UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
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| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
OR
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
OR
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file number 001-38209
_________________________
(Exact Name of Registrant as Specified in its charter)
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N/A
(Translation of Registrant’s name into English)
(Jurisdiction of Incorporation or Organization)
Telephone: +54 11 5173-3702
(Address of principal executive offices)
Telephone: +54 11 5173-3702
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
_________________________
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:
At December 31, 2022 | (excluding ordinary shares held in treasury and warrants) | ||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No x
Note- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | x | |||||||||
| Non-accelerated filer | o | Emerging growth company | |||||||||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes x No o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 o
If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
TABLE OF CONTENTS
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PART I.
INTRODUCTION
Unless the context suggests otherwise, references in this Annual Report to “Despegar,” the “Company,” “we” “us” and “our” are to Despegar.com, Corp., a business company incorporated in the British Virgin Islands (“BVI”), and its consolidated subsidiaries. Unless the context suggests otherwise, references to “Latin America” are to South America, Mexico, Central America and the Caribbean.
Financial Statements
Our consolidated financial information contained in this Annual Report is derived from our audited consolidated financial statements as of December 31, 2022 and 2021 and for the fiscal years ended December 31, 2022, 2021 and 2020 included in this Annual Report. Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and presented in U.S. dollars.
Subsequent to the issuance of our consolidated financial statements included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2021, which was filed with the U.S. Securities and Exchange Commission (the "SEC") on April 29, 2022, we identified errors in certain prior period amounts. Accordingly, we have corrected these errors in our consolidated financial statements and related notes as of and for the year ended December 31, 2022. We have evaluated the materiality of these errors based on an analysis of quantitative and qualitative factors and concluded that they are not material to the prior period financial statements, individually or in aggregate. See "Item 5. Operating and Financial Review and Prospects— A. Operating Results— Revision of Previously Filed Consolidated Financial Statements" and Note 2 to our consolidated financial statements.
Segment Information
We determine our operating segments based on how our chief operating decision makers (“CODM”) manage our business, make operating decisions and evaluate operating performance. Effective for our fiscal year 2022, our CODM changed their internal reporting to refine the way they view our financial services business and its interaction with our travel business. Additionally, we started allocating certain expenses to our segments which were previously considered part of our corporate structure and were unallocated. These changes resulted in revisions to the financial information provided to the CODM on a recurring basis in their evaluation of our financial performance and the decision-making process. Accordingly, we changed our segment reporting under ASC 280 “Segment Reporting” to report three reportable segments: “Air”, “Packages, Hotels and Other Travel Products” and “Financial Services”. We have recast previously reported segment financial information for our 2020 and 2021 fiscal years in our audited consolidated financial statements as of December 31, 2022 and 2021 and for the fiscal years ended December 31, 2022, 2021 and 2020 included in this Annual Report to reflect our new reportable segments’ structure.
For our fiscal year 2022, we revised the presentation of credit loss expense in our consolidated statements of operations. Previously, we classified credit loss expense within general and administrative expenses. In line with the increasing significance of our financial services business and the impact of its credit loss expense to our consolidated operations, we determined that the credit loss expense would be more appropriately reflected in the financial statement line item cost of revenue. We reclassified our entire credit loss expense in the previous financial statements included in this Annual Report to be comparable with our current presentation. For more information, see Note 2 to our consolidated financial statements.
Adjusted Segment EBITDA
For all our segments, our primary operating performance measure is Adjusted Segment EBITDA. We use Adjusted Segment EBITDA for purposes of making decisions about allocating resources to our segments and to internally evaluate their financial performance because we believe Adjusted Segment EBITDA reflects current core operating performance of each segment and provides an indicator of each segment’s ability to generate cash.
We calculate Adjusted Segment EBITDA, with respect to each segment, as our net loss for the year adjusted for (1) provision for income taxes; (2) financial results, net; (3) stock-based compensation expense; (4) acquisition transaction costs; (5) depreciation and amortization; (6) impairment charges; and (7) restructuring and reorganization charges. See Note 22 to our consolidated financial statements for our Adjusted Segment EBITDA and segment information.
Non-GAAP Financial Information
This Annual Report includes certain references to Consolidated Adjusted EBITDA, a non-GAAP financial measure. We calculate Consolidated Adjusted EBITDA as net loss for the year adjusted for (1) provision for income taxes; (2) financial results, net; (3) stock-based compensation expense; (4) acquisition transaction costs; (5) depreciation and amortization; (6) impairment charges; and (7) restructuring and reorganization charges. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results — Operating and Financial Metrics” for a reconciliation of Consolidated Adjusted EBITDA to net loss. Consolidated Adjusted EBITDA is not prepared in accordance with U.S. GAAP. Accordingly, you are cautioned not to place undue reliance on this information and should note that Consolidated Adjusted EBITDA, as calculated by us, may differ materially from similarly titled measures reported by other companies, including our competitors.
Market Data
This Annual Report includes industry, market and competitive position data that we have derived from independent consultant reports, publicly available information, industry publications, official government information and other third-party sources, as well as our internal data and estimates. Independent consultant reports, industry publications and other published sources generally indicate that the information contained therein was obtained from sources believed to be reliable. Although we believe that this information is reliable, the information has not been independently verified by us.
Certain Operating Measures
This Annual Report includes certain references to the number of travel customers, the number of transactions and gross bookings and total payment volume, which are operating measures. Starting for the year ended December 31, 2022, we have revised how we calculate our number of travel customers to reflect, during a given period, the number of customers who purchased and finalized payment for one or more of our travel products. Prior year information has been revised to conform to current year presentation. We define the number of transactions as the total number of travel customer orders completed on our platform or financing merchant customers (excluding Decolar) of the "Buy Now, Pay Later" solution during a given period. We define gross bookings as the aggregate purchase price of all travel products booked by our travel customers through our platform during a given period related to our travel business. We define total payment volume as the US dollar loan volume processed by our financial services business during a given period. For more information, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results — Operating and Financial Metrics.”
Currency Presentation
In this Annual Report, references to “dollars” and “$” are to the currency of the United States, references to “Brazilian real,” “Brazilian reais ” and “R$” are to the currency of Brazil, references to “Mexican peso” and “MX$” are to the currency of Mexico and references to “Argentine pesos” and “AR$” are to the currency of Argentina.
Rounding
Certain figures included in this Annual Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be exact arithmetic aggregations or percentages of the figures that precede them.
Trademarks
Our key trademarks are “Despegar”, “Despegar.com”, “Decolar”, “Decolar.com”, “Best Day”, “BD Experience”, “HotelDo”, "Viajanet", "Stays" and “Koin”. Other trademarks or service marks appearing in this Annual Report are the property of their respective holders. Solely for the convenience of the reader, we refer to our brands in this Annual Report without the ® symbol, but these references are not intended to indicate in any way that we will not assert our rights to these brands to the fullest extent permitted by law.
Forward-Looking Statements
This Annual Report includes forward-looking statements, principally under the captions “Item 3. Key Information,” “Item 4. Information on the Company––Business Overview” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business and our market. Many important factors, in addition to those discussed elsewhere in this Annual Report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements.
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We operate in a competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report. The words “believe,” “may,” “should,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “will,” “expect” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, capital expenditures, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this Annual Report because of new information, future events or other factors. These statements are intended to qualify for the safe harbors from liability provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are not guarantees of future performance and the future events and circumstances discussed in this Annual Report may not occur or come into existence. Considering these limitations, you should not make any investment decision in reliance on forward-looking statements contained in this Annual Report. In evaluating forward-looking statements, current and prospective shareholders should specifically consider various factors, including the risks listed below and those discussed under the caption “Item 3. Key Information—D. Risk Factors” in this Annual Report.
These cautionary statements should not be construed by you to be exhaustive and are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Additional Information
Our principal website addresses are www.despegar.com and www.decolar.com. The information on our websites should not be deemed to be part of this Annual Report. SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with SEC using its EDGAR system.
ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3 KEY INFORMATION
A.[Reserved]
B.Capitalization and Indebtedness
Not applicable.
C.Reasons for the Offer and Use of Proceeds
Not applicable.
D.Risk Factors
Summary of Risk Factors
The following summarizes some, but not all, of the principal risks provided below. Please carefully consider all of the information discussed in this Item 3.D “Risk Factors” in this Annual Report for a detailed description of these and other risks.
•The COVID-19 pandemic disrupted the global economy and travel industry and, consequently, adversely affected our business, results of operations and cash flows.
•We are subject to the risks generally associated with doing business in Latin America.
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•General declines or disruptions in the travel industry may adversely affect our business and results of operations.
•Our business and results of operations could be adversely affected by macroeconomic and political conditions.
•If we are unable to maintain or increase consumer traffic to our sites and our conversion rates, our business and results of operations may be harmed.
•We operate in a highly competitive and evolving market, and pressure from existing and new companies may adversely affect our business and results of operations.
•If we are unable to maintain existing, and establish new arrangements with travel suppliers, our business may be adversely affected.
•We rely on the value of our brands, and any failure to maintain or enhance consumer awareness of our brands could adversely affect our business and results of operations.
•We rely on information technology to operate our business and maintain our competitiveness, and any failure to adapt to technological developments or industry trends could adversely affect our business.
•Some of our airline suppliers (including our GDS service providers) may reduce or eliminate the commission and other compensation they pay to us for the sale of airline tickets, which could adversely affect our business and results of operations.
•Our business and results of operations could be adversely affected when one or more of our major travel suppliers suffers a deterioration in its financial condition or restructures its operations.
•Any system interruption, security breaches, or lack of sufficient redundancy in our information systems may harm our businesses.
•We are subject to payments-related fraud risks.
•Our ability to attract, train and retain executives and other qualified employees, particularly highly-skilled IT professionals, is critical to our business and future growth.
•We rely on third-party systems and service providers and any disruption or adverse change in their businesses could have a material adverse effect on our business.
•Our business depends on the availability of credit cards and financing options for consumers.
•We rely on banks or payment processors to collect payments from travel customers and facilitate payments to suppliers, and changes to credit card association fees, rules or practices may adversely affect our business.
•Our business could be negatively affected by changes in search engine algorithms and dynamics or other traffic-generating arrangements.
•Our business depends on the continued growth of e-commerce and the availability and reliability of the internet in Latin America.
•Growth of e-commerce transactions in Latin America may be impeded by the lack of secure payment methods.
•Our future success depends on our ability to expand and adapt our operations in a cost-effective and timely manner.
•Acquisitions could present risks and disrupt our ongoing business.
•Our financial services business exposes us to additional risks and we may not be successful in growing the business.
•Inadequate credit analysis may adversely affect our financial services business.
•If our collection efforts on delinquent loans in our financial services business are ineffective or unsuccessful, the performance of the loans would be adversely affected.
•Changes in market interest rates could have an adverse effect on financial service business.
•We rely on funding sources to support our financial services business.
•Application of existing tax laws or regulations is subject to interpretation by taxing authorities, we are routinely audited by tax authorities and we are subject to potential tax, labor and social security contingencies and tax liabilities related to uncertain tax positions.
•Internet regulation in the countries where we operate is scarce, and several legal issues related to the internet are uncertain.
•We process, store and use personal information, card payment information and other consumer data, which subjects us to risks stemming from possible failure to comply with governmental regulation and other legal obligations.
•Amendment to existing tax laws or regulations or enactment of new unfavorable tax laws or regulations could adversely affect our business and results of operations.
•We are, and may be in the future, involved in various legal proceedings, the outcomes of which could adversely affect our business and results of operations.
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•We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.
•Increased labor costs, compliance with labor laws and regulations and failure to maintain good relations with labor unions may adversely affect our results of operations.
•A failure to comply with current laws, rules and regulations or changes to such laws, rules and regulations and other legal uncertainties may adversely affect our business, results of operations or business growth.
•Complaints from travel customers or negative publicity about our services can diminish consumer confidence and adversely affect our business.
•Consumer adoption and use of mobile devices creates new challenges.
•We rely on Expedia for substantially all of the hotel and other lodging products that we offer for all countries outside Latin America.
•We may experience constraints in our liquidity and may be unable to access capital when necessary or desirable, either of which could adversely affect our financial condition.
You should carefully consider the risks described below, in addition to the other information contained in this Annual Report. We also may face additional risks and uncertainties that are not presently known to us, or that as of the date of this Annual Report we deem immaterial, which may impair our business, financial condition and results of operations. If any of these events occur, the trading price of our ordinary shares could decline. In general, you take more risk when you invest in the securities of issuers with operations in emerging markets such as Latin American countries than when you invest in the securities of issuers in the United States and other developed markets. The information in this Risk Factors section includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of numerous factors, including those described in “Forward-Looking Statements.”
Risks Related to Our Business
The COVID-19 pandemic disrupted the global economy and travel industry and, consequently, adversely affected our business, results of operations and cash flows.
The outbreak of COVID-19 in 2020 disrupted worldwide economic activity and –in particular– the travel industry. Countries around the world, including across Latin America, adopted extraordinary measures to limit the spread of COVID-19, including imposing travel restrictions and bans, closing borders, establishing restrictions on public gatherings, instructing residents to practice social distancing, requiring closures of non-essential businesses, issuing stay at home advisories and orders, implementing quarantines, vaccination mandates and similar actions. As a result, global travel demand declined significantly and, consequently, resulted in a material adverse effect in our business, results of operations and cash flows.
With the availability of vaccines and increasing familiarity with the virus, as well as the evolution of milder COVID-19 variants, most COVID-19 related travel restrictions have been lifted, and countries around the world have reopened their borders for foreign travel. However, a resurgence of new variants of the virus could have a significant impact on the global economy and travel industry in the future. Overall, the full duration and impact of the COVID-19 pandemic remains uncertain, and it is difficult to predict how the recovery will continue to unfold with respect to the travel industry and our business, going forward.
The pandemic impeded global economic activity for an extended period and could impact the economy in the future. The pandemic led to a significant decrease in per capita income and disposable income, increased and sustained unemployment, and a decline in consumer confidence, all of which significantly reduced discretionary spending by individuals and businesses on travel. In turn, these effects negatively impacted demand for travel services. While the global economy recovered during 2021 and 2022, and in 2022 we experienced a significant recovery in travel demand, we cannot predict how the pandemic will affect the travel industry and our business in the long term.
As an intermediary in the travel industry, a significant portion of our revenue is affected by the operations of our travel suppliers. The effects of the pandemic and governments’ measures forced many travel suppliers to reduce operations and to seek government support in order to maintain their businesses. The suspension or termination of services by major travel suppliers, in particular airlines, negatively impacts the products we can offer to our travel customers. We cannot predict the long-term effects of the COVID-19 pandemic on our travel suppliers or the ways that the pandemic may fundamentally
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alter the travel industry. In particular, we may need to adjust to a travel industry with fewer and different suppliers as well as structural changes to certain types of travel.
Additionally, as a result of the COVID-19 pandemic, an increasing number of our employees have been working remotely. Employing a remote work environment could affect employee productivity, including due to a lower level of employee oversight, distractions caused by the pandemic and its impact on daily life, health conditions or illnesses, disruptions due to caregiving or childcare obligations or slower or unreliable internet access. If our productivity is impacted as a result of the transition, we may incur additional costs to address such issues and our financial condition and results may be adversely impacted.
While we have undertaken actions to mitigate the effects of COVID-19 on our business, our cost-savings activities may lead to disruptions in our business, inability to enhance or preserve our brand awareness, reduced employee morale and productivity, increased attrition, and problems retaining existing and recruiting future employees.
A resurgence in the spread of new variants of COVID-19, or the emergence of new pandemics, or even widespread fear of contagious diseases, could impact economic activity and travel and, consequently, could adversely affect our business in the future.
We are subject to the risks generally associated with doing business in Latin America.
Our business serves the Latin American travel industry and substantially all of our revenue is derived from Latin American countries. Substantially all of our operations are located in Latin America. Moreover, we have a significant number of transactions from Brazil, Mexico and Argentina as well as other Latin American countries. In 2022 Brazil accounted for 35% of our total number of transactions, Mexico accounted for 20% of our total number of transactions and Argentina accounted for 14% of our total number of transactions. For more information, see “—Risks Related to Latin America.”
General declines or disruptions in the travel industry may adversely affect our business and results of operations.
Our business is significantly affected by the trends that occur in the travel industry. As the travel industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Trends or events that tend to reduce travel and are likely to reduce our revenue include:
•health-related risks, such as pandemics;
•terrorist attacks or threats of terrorist attacks or wars;
•fluctuations in currency exchange rates;
•increased prices in the airline ticketing, hotel, or other travel-related sectors;
•significant changes in oil prices; travel-related strikes or labor unrest, bankruptcies or liquidations;
•travel-related accidents or the grounding of aircraft due to safety or other concerns;
•political unrest and geopolitical conflicts;
•high levels of crime;
•natural disasters or severe weather conditions, including volcanic eruptions, hurricanes, flooding or earthquakes;
•changes in immigration policy; and
•travel restrictions or other security procedures implemented in connection with any major events, particularly those that affect travel by Latin Americans within their respective countries, across the region and outbound from the region to the rest of the world.
We could be severely and adversely affected by declines or disruptions in the travel industry and, in many cases, have little or no control over the occurrence of such events. Such events could result in a decrease in demand for our travel services. Any decrease in demand, depending on the scope and duration, could significantly and adversely affect our business and financial performance over the short and long term.
Our business and results of operations could be adversely affected by macroeconomic and political conditions.
Our results of operations are affected by global macroeconomic and political conditions, including inflation, interest rates, availability of capital, energy and commodity prices, trade laws and the effects of governmental initiatives to manage economic conditions. Global macroeconomic and political conditions may also materially affect travel suppliers and travelers. The ongoing conflict in Ukraine and the imposition of broad economic sanctions on Russia, for example, could
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raise energy prices again, disrupt global markets and, generally, have a negative impact on the global economic and political conditions in the future.
Consumer purchases of discretionary items generally decline during periods of recession and other periods in which disposable income is adversely affected. As a substantial portion of travel expenditure, for both business and leisure, is discretionary, the travel industry tends to experience weak or reduced demand during economic downturns.
General adverse economic conditions, including the possibility of recessionary conditions in Latin America or a worldwide economic slowdown, would adversely impact our business, financial condition and results of operations. As an intermediary in the travel industry, a significant portion of our revenue is affected by prices charged by travel suppliers. During periods of poor economic conditions, airlines, hotels and other travel suppliers tend to reduce rates or offer discounted sales to stimulate demand, thereby reducing our commission-based income. A slowdown in economic conditions may also result in a decrease in transaction volumes and adversely affect our revenue, including our consumer fee-based income. It is difficult to predict the effects of the uncertainty in global economic conditions.
If economic conditions decline globally or in Latin America, our business, financial condition and results of operations could be adversely impacted.
We incurred significant net losses, operating losses and negative operating cash flows, and may experience losses in the future.
As a result of the COVID-19 pandemic, we incurred significant losses which increased our accumulated losses to $643.3 million and our shareholders’ deficit to $127.2 million as of December 31, 2022. In 2022, 2021 and 2020, we incurred net losses of $68.5 million, $105.9 million and $142.9 million, and operating losses of $1.8 million, $95.9 million and $177.2 million, respectively. During 2020 and 2021, we had negative operating cash flows of $118.3 million and $36.5 million, respectively, although we experienced positive operating cash flows of $36.7 million during 2022.
We cannot assure you that we will achieve profitability in the future. Our ability to achieve profitability depends on various factors, including our ability to generate additional transaction volume and revenue and control our costs and expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this Annual Report, and we may further encounter unforeseen expenses, difficulties, complications, delays, and other unknown events. If our costs and expenses increase at a more rapid rate than our revenue, we may not be able to sustain profitability and may incur losses.
If we are unable to maintain or increase consumer traffic to our sites and our conversion rates, our business and results of operations may be harmed.
Our ability to generate revenue depends, in part, on our ability to attract consumers to our platform. If we fail to maintain or increase consumer traffic and our conversion rates, our ability to grow our revenue could be negatively affected. We expect that our efforts to maintain or increase traffic are likely to include, among other things, significant increases to our marketing expenditures. We cannot assure you that any increases in our expenses will be successful in generating additional consumer traffic.
Additionally, some of our services and marketing activities rely on cookies, which are placed on individual browsers when users visit websites. We use these cookies to optimize our marketing campaigns, to better understand our users’ preferences and to detect and prevent fraudulent activity. Users however can block or delete cookies through their browsers or “ad blocking” software or apps.
Any decrease to user retention, growth, or engagement could render our products less attractive to consumers and would seriously harm our business.
We operate in a highly competitive and evolving market, and pressure from existing and new companies may adversely affect our business and results of operations.
The travel market in Latin America and worldwide is intensely competitive and rapidly evolving. Factors affecting our competitive success include, among other things, price, availability and breadth of choice of travel services and products, brand recognition, customer service, fees charged to travelers, ease of use, accessibility, consumer payment options and reliability. We currently compete with both established and emerging providers of travel services and products, including
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regional offline travel agency chains and tour operators, global OTAs with presence in Latin America and smaller, country-specific online and offline travel agencies and tour operators. In addition, our travel customers have the option to book travel directly with airlines, hotels and other travel suppliers who are increasingly focused on further refining their online offerings. Large, established internet search engines have also launched applications offering travel itineraries in destinations around the world, and meta-search companies who can aggregate travel search results also compete against us for travel customers. We also face competition from Airbnb and other providers acting in the alternative accommodations space. In addition, we face price competition from new entrants that offer discounted rates and other incentives from time to time, as well as social media channels that market travel products and experiences. Some of our competitors have significantly greater financial and other resources than us. From time to time we may be required to reduce service fees and revenue margins in order to compete effectively and maintain or gain travel customers, brand awareness and supplier relationships.
Further, we may also face increased competition from new entrants in our industry. We cannot assure you that we will be able to successfully compete against existing or new competitors. If we are not able to compete effectively, our business, financial condition and results of operations may be adversely affected.
Some travel suppliers are seeking to decrease their reliance on distribution intermediaries like us by promoting direct distribution channels. Many airlines, hotels, car rental companies and tour operators have call centers and have established their own travel distribution websites and mobile applications. From time to time, travel suppliers offer advantages, such as bonus loyalty awards and lower transaction fees or discounted prices, when their services and products are purchased from supplier-related channels. We also compete with competitors which may offer less content, functionality and marketing reach but at a relatively lower cost to suppliers. If our access to supplier-provided content or features were to be diminished either relative to our competitors or in absolute terms or if we are unable to compete effectively with travel supplier-related channels or other competitors, our business could be materially and adversely affected.
If we are unable to maintain existing, and establish new arrangements with travel suppliers, our business may be adversely affected.
Our business is dependent on our ability to maintain our relationships and arrangements with existing suppliers, such as airlines, global distribution system (GDS), service providers, hotels, hotel consolidators and destination services companies, car rental companies, bus operators, cruise companies and travel assistance providers, as well as our ability to establish and maintain relationships with new travel suppliers. In addition, the hotel and other lodging products that we offer through our platform for all countries outside Latin America are provided to us substantially all by affiliates of Expedia, and Expedia is the preferred provider to us of hotel and other lodging products in Latin America, pursuant to a lodging outsourcing agreement (the “Expedia Outsourcing Agreement”). For more information on our relationships with Expedia, see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions— Relationship with Expedia.” Adverse changes in key arrangements with our suppliers, including an inability of any key travel supplier to fulfill its payment obligation to us in a timely manner, increasing industry consolidation or our inability to enter into or renew arrangements with these parties on favorable terms, if at all, could reduce the amount, quality, pricing and breadth of the travel services and products that we are able to offer, which could adversely affect our business, financial condition and results of operations.
We cannot assure you that our agreements or arrangements with our travel suppliers or travel-related service providers will continue or that our travel suppliers or travel-related service providers will not further reduce commissions, terminate our contracts, make their products or services unavailable to us as part of exclusive arrangements with our competitors or default on or dispute their payment or other obligations towards us, any of which could reduce our revenue and margins or may require us to initiate legal or arbitral proceedings to enforce their contractual payment obligations, which may adversely affect our business, financial condition and results of operations.
We rely on the value of our brands, and any failure to maintain or enhance consumer awareness of our brands could adversely affect our business and results of operations.
We believe continued investment in our brand is critical to retain and expand our business. The travel customers’ awareness of our brand, which we foster via our online and offline marketing throughout our target markets in Latin America, has become one of the most important drivers of growth in our travel customer base, and we believe that our brands are well recognized in the Latin American travel market. We have invested in developing and promoting our brand since our inception and expect to continue to spend on maintaining the value of our brands to enable us to compete against increased spending by competitors and to allow us to expand into new services or increase our penetration in certain markets where our brands are less well known.
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We cannot assure you that we will be able to successfully maintain or enhance consumer awareness of our brands. Even if we are successful in our branding efforts, such efforts may not be cost-effective. Our marketing costs may also increase as a result of inflation in media pricing. If we are unable to maintain or enhance consumer awareness of our brands and generate demand in a cost-effective manner, it would negatively impact our ability to compete in the travel industry and would have a material adverse effect on our business, financial condition and results of operations.
We rely on information technology to operate our business and maintain our competitiveness, and any failure to adapt to technological developments or industry trends could adversely affect our business.
We depend on the use of sophisticated information technology and systems, for search and reservation for airline tickets, hotels, and any of the other products that we offer on our platform, as well as payments, refunds, customer relationship management, communications and administration. As our operations grow in both size and scope, we must continuously improve and upgrade our systems and infrastructure to improve services, features and functionality, while maintaining the reliability and integrity of our systems and infrastructure in a cost-effective manner. Our future success also depends on our ability to upgrade our services and infrastructure ahead of rapidly evolving consumer demands while continuing to improve the performance, features and reliability of our service in response to competitive offerings.
We may not be able to maintain or replace our existing systems or introduce new technologies and systems as quickly as our competitors, in a cost-effective manner or at all. We may also be unable to devote adequate financial resources to develop or acquire new technologies and systems in the future.
We may not be able to use new technologies effectively, or we may fail to adapt our websites, mobile apps, transaction processing systems and network infrastructure to meet consumer requirements or emerging industry standards, comply with government regulation or prevent fraud or security breaches. If we face material delays in introducing new or enhanced solutions, our travel customers may forego the use of our services in favor of those of our competitors. Any of these events could have a material adverse effect on our business, financial condition and results of operations.
Some of our airline suppliers (including our GDS service providers) may reduce or eliminate the commission and other compensation they pay to us for the sale of airline tickets, which could adversely affect our business and results of operations.
In our air business, we generate revenue through commissions and incentive payments from airline suppliers (including our GDS service providers) and service fees charged to our travel customers. Our airline suppliers (including our GDS service providers) may reduce or eliminate the commissions, incentive payments or other compensation they pay to us. To the extent any of our airline suppliers (including our GDS service providers) reduce or eliminate the commissions, incentive payments or other compensation they pay to us, our revenue may be reduced unless we are able to adequately mitigate such reduction by increasing the service fee we charge to our travel customers or increasing our transaction volume in a sustainable manner. However, any increase in service fees may also result in a loss of potential travel customers. In addition, our arrangement with the airlines that supply airline tickets to us may limit the amount of service fee that we are able to charge our travel customers. Our business would also be negatively impacted if competition or regulation in the Latin American travel industry causes us to have to reduce or eliminate our service fees.
Our business and results of operations could be adversely affected when one or more of our major travel suppliers suffers a deterioration in its financial condition or restructures its operations.
As we are an intermediary in the travel industry, a substantial portion of our revenue is affected by the prices charged by our suppliers, including airlines, GDS service providers, hotels, destination service providers, car rental suppliers, tour operators, supply aggregators (such as other OTAs), cruise operators, bus service providers and travel assistance providers, and the volume of products offered by our suppliers. As a result, if one or more of our major suppliers suffers a deterioration in its financial condition or restructures its operations, it could adversely affect our business, financial condition and results of operations. Accordingly, our business may be negatively affected by adverse changes in the markets in which our suppliers operate.
In particular, as a substantial portion of our revenue depends on our sales of airline flights, we could be adversely affected by changes in the airline industry, including consolidation or bankruptcies and liquidations, and in many cases, we will have no control over such changes. Any consolidation in the airline industry in the future would result in fewer airlines with potentially more bargaining power with respect to the commissions and incentive payments or other fees they pay to
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intermediaries. Events or weaknesses specific to the airline industry that could negatively affect our business include airfare fluctuations, airport, airspace and landing fee increases, seat capacity constraints, removal of destinations or flight routes, travel-related strikes or labor unrest, imposition of taxes or surcharges by regulatory authorities and fuel price volatility.
If one of our major airline suppliers merges or consolidates with, or is acquired by, another company that either does not participate in the GDS systems we use, or that participates in such systems but at substantially lower levels, the surviving company may elect not to make supply available to us or may elect to do so at lower levels than the previous supplier. Similarly, in the event that one of our major airline suppliers voluntarily or involuntarily declares bankruptcy and is subsequently unable to successfully emerge from bankruptcy, and we are unable to replace such supplier, our business would be adversely affected. In addition, in certain of the countries in which we operate, we may be liable to claims from customers for suspension or termination of services in the event an airline files for bankruptcy. Further consolidation of one or more of the major airlines could result in further capacity reductions, a reduction in the number of airline tickets available for booking on our website and increased air fares, which may have a negative impact on demand for travel products.
The suspension or termination of services by major travel suppliers, in particular airlines, may affect the products we can offer to our travel customers. Furthermore, in certain of the countries in which we operate, we could potentially be liable for suspended or terminated bookings in the event of bankruptcy by the airline or other travel service provider.
Any system interruption, security breaches, or lack of sufficient redundancy in our information systems may harm our businesses.
We rely on information technology systems, including the internet and third-party hosted services, to support a variety of business processes including booking transactions, and activities and to store sensitive data, including our proprietary business information and that of our suppliers, personally identifiable information and other information of our travel customers and employees and data with respect to invoicing and the collection of payments, accounting and procurement activities. In addition, we rely on our information technology systems to process financial information and results of operations for internal reporting purposes and to comply with financial reporting, legal, and tax requirements. The risk of a cybersecurity-related attack, intrusion, or disruption, including spyware, viruses, phishing, denial of service and similar attacks by criminal organizations, hacktivists, foreign governments, and terrorists, is persistent. We have experienced and may in the future experience system interruptions that make some or all of these systems unavailable or prevent us from efficiently fulfilling orders or providing services to third parties. Interruptions of this nature could include security intrusions and attacks on our systems for fraud or service interruption. Significant interruptions, outages or delays in our internal systems, or systems of third parties that we rely upon—including multiple co-location providers for data centers, cloud computing providers for application hosting, and network access providers—and network access, or deterioration in the performance of such systems, would impair our ability to process transactions, decrease our quality of service that we can offer to our travel customers, damage our reputation and brands, increase our costs and/or cause losses.
Potential security breaches to our systems or the systems of our service providers, whether resulting from internal or external sources, could significantly harm our business. We devote significant resources to network security, monitoring and testing, employee training, and other security measures, but we cannot assure you that these measures will prevent all possible security breaches or attacks that could cause significant interruptions in our operations. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches, and reductions in website availability could cause a loss of substantial business volume during the occurrence of any such incident. Because the techniques used to sabotage security change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventive measures. We have obtained cyber insurance, however we cannot assure you that our insurance will be sufficient to protect against our losses or will cover all potential incidents. Moreover, security breaches could result in negative publicity and damage to our reputation, exposure to risk of loss or litigation and possible liability due to regulatory penalties and sanctions or pursuant to our contractual arrangements with payment card processors for associated expenses and penalties. Security breaches could also cause travel customers and potential users and our suppliers to lose confidence in our security, which would have a negative effect on the value of our brands. Failure to adequately protect against attacks or intrusions, whether for our own systems or those of our suppliers, could expose us to security breaches that could have an adverse impact on our financial performance.
In addition, we cannot assure you that our backup systems or contingency plans will sustain critical aspects of our operations or business processes in all circumstances, many other systems are not fully redundant and our disaster recovery
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or business continuity planning may not be sufficient. Fire, flood, power loss, telecommunications failure, break-ins, earthquakes, acts of war or terrorism, acts of God, computer viruses, electronic intrusion attempts from both external and internal sources and similar events or disruptions may damage or impact or interrupt computer or communications systems or business processes at any time. Although we have put measures in place to protect certain portions of our facilities and assets, any of these events could cause system interruption, delays and loss of critical data, and could prevent us from providing services to our travel customers and/or third parties for a significant period of time. Remediation may be costly and we may not have adequate insurance to cover such costs. Moreover, the costs of enhancing infrastructure to attain improved stability and redundancy may be time consuming and expensive and may require resources and expertise that are difficult to obtain.
We are subject to payments-related fraud risks.
We are held liable for accepting fraudulent bookings on our platform and other bookings for which payment is successfully disputed by the cardholder, both of which lead to the reversal of payments received by us for such bookings (referred to as a “chargeback”). Our results of operations may be negatively affected by our acceptance of fraudulent bookings made using credit cards. Our ability to detect and combat fraud, which has become increasingly common and sophisticated, may be negatively impacted by the adoption of new payment methods, the emergence and innovation of new technology platforms, including smartphones, tablets and other mobile devices, and our expansion, including into geographies with a history of elevated fraudulent activity. If we are unable to effectively combat fraud on our platform or if we otherwise experience increased levels of chargebacks, our results of operations could be materially adversely affected.
We have agreements with companies that process travel customers’ credit and debit card transactions for the facilitation of travel customer bookings of travel services from our travel suppliers. These agreements allow these processing companies, under certain conditions, to hold an amount of our cash (referred to as a “holdback”) or require us to otherwise post security equal to a portion of bookings that have been processed by such companies. These processing companies may be entitled to a holdback or suspension of processing services upon the occurrence of specified events, including material adverse changes in our financial condition. Moreover, there can be no assurance that the rates we pay for the processing of travel customer’s credit and debit card transactions will not increase, which could reduce our revenue thereby adversely affecting our business and financial performance.
In addition, when onboarding suppliers to our platform, we may fail to identify falsified or stolen supplier credentials, which may result in fraudulent bookings or unauthorized access to personal or confidential information of users of our websites and mobile applications. A fraudulent supplier scheme could also result in negative publicity and damage to our reputation and could cause users of our websites and mobile applications to lose confidence in the quality of our services. Any of these events would have a negative effect on the value of our brands, which could have an adverse impact on our financial performance.
Our ability to attract, train and retain executives and other qualified employees, particularly highly-skilled IT professionals, is critical to our business and future growth.
Our business and future success is substantially dependent on the continued services and performance of our key executives, senior management and skilled personnel, particularly personnel with experience in our industry and our information technology and systems. Any of these individuals may choose to terminate their employment with us at any time and we cannot assure you that we will be able to retain these employees or find adequate replacements, if at all.
The specialized skills we require can be difficult, time-consuming, and expensive to acquire and/or develop and, as a result, these skills are often in short supply. A lengthy period of time may be required to hire and train replacement personnel when skilled personnel depart our company. Our ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees. We may be required to increase our levels of employee compensation more rapidly than in the past to remain competitive in attracting the quality of employees that our business requires. Competition for these personnel is intense, and we cannot assure you that we will be able to successfully attract, integrate, train, retain, motivate and manage sufficiently qualified personnel. In addition, prospective and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, experiences significant volatility or increases such that prospective employees or independent contractors believe there is limited or less upside to the value of our equity awards, it may adversely affect our ability to recruit and retain key employees.
In addition, we compete for talented individuals not only with other companies in our industry but also with companies in other industries, such as software services, engineering services and financial services companies, among others, and there is a limited pool of individuals who have the skills and training needed to help us grow our company. High attrition rates of
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qualified personnel could have an adverse effect on our ability to expand our business, as well as cause us to incur greater personnel expenses and training costs.
Moreover, while we sometimes require our senior management to sign non-compete agreements, typically for a period of one year following termination, we cannot assure you that our former employees will not compete with us in the future. In addition, these non-compete agreements may be difficult to enforce in certain Latin-American jurisdictions.
If we are unable to identify, attract, hire, train and retain sufficient employees in these areas, users may not have satisfactory experiences and may turn to our competitors, which may adversely affect our business and results of operations.
We rely on third-party systems and service providers and any disruption or adverse change in their businesses could have a material adverse effect on our business.
We currently rely on a variety of third-party systems, service providers and software companies, including the GDS and other electronic central reservation systems used by airlines, various channel managing systems and reservation systems used by other suppliers, as well as other technologies used by payment gateway providers.
Any interruption or deterioration in performance of these third-party systems and services could have a material adverse effect on our business. Further, the information provided to us by certain of these third-party systems may not always be accurate due to either technical glitches or human error, and we may incur monetary and/or reputational loss as a result.
Our success is also dependent on our ability to maintain our relationships with these third-party systems and service providers. In the event our arrangements with any of these third parties are impaired or terminated, we may not be able to find an adequate alternative source of systems support on a timely basis or on commercially reasonable terms, which could result in significant additional costs or disruptions to our business. Any security breach at one of these companies could also affect our travel customers and harm our business.
Our business depends on the availability of credit cards and financing options for consumers.
Our business is highly dependent on the availability of credit cards and financing options for consumers. The continued growth of our business is also partially dependent on the expansion of credit card penetration in Latin America, which may never reach a percentage similar to more developed countries for reasons that are beyond our control, such as low credit availability for a significant portion of the population in such countries. The provision of credit cards and other consumer financing depends on the product offerings at local and regional banks operating in the countries we serve. In the past, banking systems in Latin America have suffered disruptions and significantly limited availability and increased cost of consumer credit. Banks may also change their product offerings that they provide to consumers or may change the availability or costs of such products, due to credit, regulations or other reasons beyond our control.
We rely on various banks to provide financing to our travel customers who elect to use an installment plan payment option. Under our agreements with local and regional banks, we offer consumers the possibility of financing their purchases under installment plans established, offered and administered by the credit card holders’ issuing banks. Under these agreements, the banks provide the financing arrangements to the consumers and they assume the risk of any potential payment default or delinquency by consumers. Some of our competitors also offer installment plans and may offer installment plans with more attractive terms. If we are not able to offer a competitive selection of installment plan financing at competitive rates, our business and results of operations could be adversely affected. Moreover, our agreements with local banks allow us to offer installment payment plans without assuming collection risk from the travel customer and receive payment in full (provided we choose not to factor such installment payments). We cannot assure you that local banks will not change their credit practices in the future. If our arrangements with local banks are impaired or terminated, our business and results of operations could be adversely affected.
In November 2021, the Central Bank in Argentina enacted Resolution 7407 which imposes restrictions on consumers’
ability to use credit card installment plans to finance international travel products and services, including air tickets, hotels
and tourism services. These restrictions currently remain in place and we cannot predict if authorities will implement any other restrictions.
We rely on banks or payment processors to collect payments from travel customers and facilitate payments to suppliers, and changes to credit card association fees, rules or practices may adversely affect our business.
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We rely on banks or payment processors to process collections and payments, and we pay a fee for this service. In the countries where we operate, the number of processors is limited so there is little or no competition among processors. From time to time, credit card associations may increase the interchange fees that they charge for each transaction using one of their cards.
For certain payment methods, including credit cards, we pay transaction and other fees, which may increase over time and raise our operating costs, lowering profitability. We rely on third parties to provide payment processing services and it could disrupt our business if these companies become unwilling or unable to provide these services to us. If we fail to comply with these third-party servicers’ rules or requirements, or if our data security systems are breached or compromised, we may be liable for chargebacks, credit card issuing banks’ costs, fines and higher transaction fees and we may lose our ability to accept credit card payments from our travel customers, process electronic funds transfers, or facilitate other types of online payments. If any of these situations were to occur, our business and results of operations could be adversely affected.
Our business could be negatively affected by changes in search engine algorithms and dynamics or other traffic-generating arrangements.
We utilize internet search engines such as Google, principally through the purchase of travel-related keywords, to generate a significant portion of the traffic to our websites. Search engines frequently update and change the algorithms that determine the placement and display of results of a user’s search. It is possible that any such update could negatively affect us or may negatively affect us relative to our competitors. We have developed search engine management tools that are designed to bid more efficiently on portfolios of travel-related keywords and we have a search engine management team dedicated to reviewing the return of investment of all biddings. We cannot assure you that these tools will be effective over the long term, as the search engine sector is dynamic and rapidly changing.
In addition, a significant amount of traffic is directed to our websites through participation in pay-per-click and display advertising campaigns on search engines, including Google, and travel metasearch engines, including TripAdvisor and Trivago. A search or metasearch engine could, for competitive or other purposes, adopt emerging technologies, such as voice, or alter its search algorithms or results, any of which could cause us to place lower in search query results, or exclude our website from the search query results. If a major search engine changes its algorithms or results in a manner that negatively affects the search engine ranking, paid or unpaid, of our websites, or if competitive dynamics impact the costs or effectiveness of search engine optimization, search engine marketing or other traffic-generating arrangements in a negative manner, this may have a material and adverse effect on our business and financial performance. In addition, certain metasearch engines have added or may add various forms of direct or assisted booking functionality to their sites. To the extent such functionality is promoted at the expense of traditional paid listings, this may reduce the amount of traffic to our websites or those of our affiliates.
Our business depends on the continued growth of e-commerce and the availability and reliability of the internet in Latin America.
The market for e-commerce is developing in Latin America. Our future revenue depends substantially on Latin American consumers’ widespread acceptance and use of the internet as a way to conduct commerce. The use of and interest in the internet (particularly as a way to conduct commerce) has grown rapidly since our inception and we cannot assure you that this acceptance, interest and use will continue in the regions we target. For us to grow our user base successfully, more consumers in our markets must accept and use new ways of conducting business and exchanging information.
The price of personal computers and/or mobile devices and internet access may limit our potential growth in countries with low levels of internet penetration and/or high levels of poverty. In addition, the infrastructure for the internet may not be able to support continued growth in the number of internet users, their frequency of use or their bandwidth requirements.
The internet could lose its viability in our target markets due to delays in telecommunications technological developments, or due to increased government regulation. If telecommunications services change or are not sufficiently available to support the internet, response times would be slower, which would adversely affect use of the internet and our service in particular. Moreover, lack of investment in mobile infrastructure in Latin America may limit the expansion of our mobile offerings, which is one of our key growth strategies.
Growth of e-commerce transactions in Latin America may be impeded by the lack of secure payment methods.
As secure methods of payment for e-commerce transactions have not been widely adopted in Latin America, both consumers and merchants may have a relatively low confidence level in the integrity of e-commerce transactions.
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Consumer confidence can be adversely affected by incidents of fraud and security breaches, including generally in the marketplace, which is beyond our control. Moreover, although we are certified under the Payment Card Industry Data Security Standards, most of our suppliers with which we share information are not. The continued growth of e-commerce in the region will depend on consumers’ confidence in the safety of online payment methods.
Our future success depends on our ability to expand and adapt our operations in a cost-effective and timely manner.
We plan to continue to expand our operations by developing and promoting new and complementary services and increasing our penetration in our markets. Moreover, we seek to expand our travel customer base as income levels and access to internet and banking services, such as credit card issuances, increase in Latin America. We may not succeed at expanding our operations in a cost-effective or timely manner, and our expansion efforts may not have the same or greater overall market acceptance as our current services. Furthermore, any new service that we launch that is not favorably received by consumers could damage our reputation and diminish the value of our brands. To expand our operations, we will also need to spend significant amounts on development, operations, and other resources, and this may place a strain on our management, financial and operational resources. Similarly, a lack of market acceptance of these services or our inability to generate satisfactory revenue from any expanded services to offset their cost could have a material adverse effect on our business, financial condition and results of operations.
We may not be successful in implementing our long-term growth strategies.
Our long term growth strategies involve expanding our service and product offerings, enhancing our service platforms and potentially pursuing acquisitions or other strategic opportunities.
Our success in implementing our growth strategies could be affected by:
•our ability to attract travel customers in a cost-effective manner, including in markets where we have lower brand awareness or operational history;
•our ability to improve the competitiveness of our product offerings including by expanding the number of suppliers and negotiating fares and rates with existing and potential suppliers;
•our ability to market and cross-sell our travel services and products to facilitate the expansion of our business;
•our ability to compete effectively with existing and new entrants to the Latin American travel industry;
•our ability to expand and promote our mobile platform;
•our ability to build required technology;
•our ability to expand our businesses through strategic acquisitions and successfully integrate such acquisitions;
•the general condition of the global economy (particularly in Latin America) and continued growth in demand for travel services, particularly online;
•the growth of the internet and mobile technology as a medium for commerce in Latin America; and
•changes in the regulatory environments where we operate.
Many of these factors are beyond our control and we cannot assure you that we will succeed in implementing our strategies. Even if we are successful in executing our growth strategies, our different businesses may not grow at the same rate or with a uniform effect on our revenue and profitability.
Acquisitions could present risks and disrupt our ongoing business.
We consider and evaluate acquisitions of, or significant investments in, complementary businesses as part of our business strategy. Acquisitions involve numerous risks, and any acquisition could have a material adverse effect on our business, financial condition and results of operations. In October 2020, we completed the acquisition of Viajes Beda, S.A. de C.V. (“Best Day”), a leading travel agency in Mexico, with business in Argentina, Colombia, Chile, Brazil, Uruguay, the Dominican Republic and the United States. In August 2020, we acquired an 84% equity stake in Koin Administradora de Cartões e Meios de Pagamentos S.A. (“Koin”), a Brazilian online payment platform and in January 31, 2022, we acquired the remaining 16% equity stake in Koin. On June 1, 2022, we acquired TVLX Viagens e Turismo S.A. ("Viajanet"), one of the leading online travel agencies in Brazil. On July 1, 2022, we completed the acquisition of a 51% ownership stake in Stays.net ("Stays"), Brazil’s leading vacation rental channel manager.
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We may seek to undertake additional strategic acquisitions in the future. We cannot assure you that we will be successful in identifying opportunities and consummating acquisitions on favorable terms or at all. Depending on the size and timing of an acquisition, we may be required to raise future financing to consummate the acquisition.
Moreover, even if we are able to consummate a transaction, acquisitions may involve significant risks and uncertainties, which risks may include: distraction of management and other employees from our day-to-day operations and the development of new business opportunities; difficulties in integrating the operations of the acquired business and technology with our existing business and technology; greater than expected costs, liabilities, expenses and working capital requirements; challenges retaining travel customers or suppliers of acquired businesses; regulatory restrictions that prevent us from achieving the expected benefits of the acquisition; we may not derive the benefits such as operational or administrative synergies we expect from acquisitions, which may result in us committing capital resources and not receiving the expected returns; difficulties in modifying accounting standards rapidly; challenges in the ability to properly access and maintain an effective internal control environment over an acquired company to comply with public reporting requirements; problems assimilating or retaining employees; and other unidentified issues or contingencies not discovered in our pre-acquisition investigations and evaluations of those strategies and acquisitions. Furthermore, acquisitions, even if successful, could result in changes to the overall business and risk profile of our operations.
Our financial services business exposes us to additional risks and we may not be successful in growing the business.
We acquired a majority equity stake in Koin in August 2020 and acquired the remaining equity stake in January 2022. Koin is a financial services company currently focused on digital payments and credit primarily in Brazil. Part of our strategy is to grow Koin’s business in Brazil and to expand its business into other markets in Latin America. Our financial services business involves additional risks not generally associated with our risks of operations, including:
•measuring and limiting credit risk adequately, in particular given that the typical "Buy Now, Pay Later" users are individuals with limited access to traditional financial services;
•managing for and limiting payment defaults;
•collectability of the loan portfolio is susceptible to changes in economic and market conditions;
•reliance on the availability of favorable financing;
•greater exposure to fraud-related risks, including identity theft and payment fraud; and
•additional compliance with legal obligations related to data privacy, data protection and information and cybersecurity.
We may not be successful in growing our financial services business, including if we are not able to adequately manage these risks.
Inadequate credit analysis may adversely affect our financial services business.
One of the payment methods we accept is the "Buy Now, Pay Later" option which is supported by our subsidiary Koin. The credit analysis of our customers' financial condition is based on Koin's proprietary risk model that uses multiple variables as predictors of the consumer’s ability to repay the credit, including external and internal indicators which are combined in a risk matrix. Koin's risk model includes a number of assumptions and projections that may prove to be incorrect, since these assumptions and projections involve the exercise of judgment. We could suffer losses due to developments that are contrary to our expectations based on incorrect assumptions used for credit calculations, including with respect to a customer's credit profile as well as with respect to macroeconomic conditions. Furthermore, the customers that we target with our "Buy Now, Pay Later" option tend to have limited credit histories and may be particularly susceptible to economic downturns. Therefore, our predictions about the repayment capacity and behavior of these customers is particularly difficult.
Although we reassess the adequacy of our credit analysis from time to time, we cannot accurately determine whether our customers will pay according to our expectations. If our customers are not able to make the committed future payments, our results of operations may be adversely affected.
If our collection efforts on delinquent loans in our financial services business are ineffective or unsuccessful, the performance of the loans would be adversely affected.
Our ability to collect on loans in our financial services business is dependent on the consumer’s continuing financial stability, and consequently, collections can be adversely affected by a number of factors, including job loss, divorce, death, illness, or personal bankruptcy. Furthermore, the application of various laws, including bankruptcy and debtor relief laws,
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may limit the amount that can be recovered on the loans. It is possible that a higher percentage of customers will seek protection under bankruptcy or debtor relief laws as a result of the current inflationary environment, the possibility of a recession and market volatility. Federal, state, or other restrictions could impair our ability to collect amounts owed and due on the loans facilitated through our platform, reduce income received from the loans facilitated through our platform, or negatively affect our ability to comply with our current financing arrangements or obtain financing with respect to the loans facilitated through our platform. In the event that initial attempts to contact a consumer are unsuccessful, certain delinquent loans may be referred to a collection agent that will service the loans using its own servicing platform. Further, if collection action must be taken in respect of a loan, the collection agent may charge additional amounts, which may reduce the amounts of collections that we receive.
Moreover, because our servicing fees in connection with the services we provide depend on the collectability of the loans facilitated through our platform, if there is an unexpected significant increase in the number of customers who fail to repay their loans or an increase in the principal amount of the loans that are not repaid, we will be unable to collect our entire servicing fee for the loans facilitated through our platform for which we act as servicer, and our business, results of operations, financial condition, future prospects, and cash flows could be materially and adversely affected our financial services business. In addition, if a consumer defaults on a loan, we may be unsuccessful in our efforts to collect the amount of the loan. As such, our originating bank partners could decide to originate fewer loans through our platform. An increase in defaults precipitated by these risks and uncertainties would adversely affect our financial services.
Changes in market interest rates could have an adverse effect on our financial services business.
The fixed interest rates charged on Koin's "Buy Now, Pay Later" option on the installment payments to our customers are calculated based upon existing and forecasted interest rates at the time of the purchase by the customer. Increases in the market benchmark would result in increases in the interest rates on new purchases. Increased interest rates may adversely impact the spending levels of consumers and their ability and willingness to purchase our products. Higher interest rates often lead to higher payment obligations, which may reduce the ability of customers to remain current on their obligations and, therefore, lead to increased delinquencies, defaults and charge-offs, and decreasing recoveries, all of which would adversely affect our results of operation.
We rely on funding sources to support our financial services business.
If we are unable to enter into new funding arrangements for our financial services business on terms acceptable to us, or at all, the prospects and growth of our financial services business would be adversely affected. To support the financial services model and the growth of our business, we must maintain a variety of funding arrangements.
We cannot assure you that funding arrangements will continue to be available on favorable terms or at all, and our funding strategy may change over time and depends on the availability of such funding arrangements. Disruptions in the credit markets or other factors, such as the current inflationary environment and rising interest rates, could adversely affect the availability, diversity, cost, and terms of our funding arrangements. In addition, our funding sources may reassess their exposure to our industry and either curtail access to uncommitted financing capacity, fail to renew or extend facilities, or impose higher costs to access our funding. The availability and diversity of our funding arrangements depends on various factors and are subject to numerous risks, many of which are outside of our control.
We depend on the accuracy and completeness of information about customers furnished to our financial services business, and any misrepresented information could adversely affect our business.
In evaluating credit risk, Koin relies on the information furnished by our customers, including identification, employment, financial condition and other relevant information. Some of the information regarding customers provided to us is used in proprietary credit scoring models, which we use to determine whether a customer meets the applicable criteria for installment payments. We rely on the accuracy and completeness of that information.
Not all customer information is independently verified. As a result, we rely on the accuracy and completeness of the information provided. If any of the information that is considered in the review process is inaccurate, incorrect or stale, whether intentional or not, and such inaccuracy or error is not detected prior to payment acceptance, the installment payment may have a greater risk of default than expected. Additionally, there is a risk that, following the date of the credit analysis that we obtain and review, a customer may have defaulted on, or become delinquent in the payment of, a pre-existing debt obligation, taken on additional debt, lost his or her job or other sources of income, or experienced other adverse financial events. Where an inaccuracy constitutes fraud or otherwise causes us to incorrectly conclude that a customer meets the applicable criteria, we generally bear the risk of loss associated with the inaccuracy. Any significant increase in inaccuracies or resulting increases in losses would adversely affect our business and results of operations.
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Application of existing tax laws or regulations is subject to interpretation by taxing authorities, we are routinely audited by tax authorities and we are subject to potential tax, labor and social security contingencies and tax liabilities related to uncertain tax positions.
The application of income and non-income tax laws and regulations to our products and services, including transfer pricing rules applicable to cross-border operations with related parties or parties in tax havens or subject to privileged fiscal regimes, is subject to interpretation by the applicable taxing authorities across the multiple jurisdictions in which we operate our business. This may contribute to an increase in audit activity and harsher stances by tax authorities. Audits include questioning the timing and the amount of income and deductions, and the allocation of income and deductions among various tax jurisdictions. As such, additional taxes or other assessments may be in excess of our current tax reserves or may require us to modify our business practices to reduce our exposure to additional taxes going forward, any of which could have a material adverse effect on our business, financial condition and results of operations.
Significant judgment and estimation is required in determining our tax liabilities. In the ordinary course of our business, there are transactions and calculations, including intercompany transactions and cross-jurisdictional transfer pricing, for which the ultimate tax determination may be uncertain or otherwise subject to interpretation. Tax authorities may disagree with our intercompany charges, including the amount of or basis for such charges, cross-jurisdictional transfer pricing or other matters, and assess additional taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals, in which case we may be subject to additional tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our cash flows and results of operations. Moreover, we have in the past and may in the future be required in certain jurisdictions to pay any such tax assessments prior to contesting their validity, which payments may be substantial.
Moreover, we are a party to a number of tax, labor and social security, regulatory and legal matters in the ordinary course of business. We estimate the range of our liability related to contingencies when we believe the amount or range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals made on the best information available at the time which can be highly subjective. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ significantly from our estimates.
As of December 31, 2022, we have recorded reserves in an aggregate amount of $8.8 million to cover for probable losses related to various lawsuits, claims and disputes mainly with customers arising out of the ordinary course of our business. Additionally, as of December 31, 2022, we also recorded reserves in an amount of $2.6 million and $27.2 million mainly related to labor and social security and tax contingencies, respectively. Labor and social security contingencies are mainly related to litigation initiated by former employees and unasserted labor claims. Tax contingencies are mainly related to unasserted claims in the jurisdictions where we operate regarding value-added taxes (“VAT”) or other taxes.
We also evaluate other potential contingent matters related to tax, labor and social security, regulatory and legal matters. As of the date of this Annual Report, we estimate possible losses related to these matters for which we have not recorded reserves, as they are not deemed probable, to be approximately in a range between $81.0 million to $154.0 million. We periodically evaluate the likelihood of probable and reasonably possible losses, if any, related to all known contingencies on an ongoing basis. Future increases or decreases to our accrued liabilities may be necessary and will be recorded in the period when such amounts are determined to be probable and reasonably estimable.
In October 2021, we became aware that the tax authority in Argentina may have a divergent interpretation of the application of VAT to certain air transactions. As of the date hereof, we have not received any assessment, inquiry, audit, or any other form of claim on our application of VAT. While we believe we have complied with applicable tax laws, rules and regulations, the Argentine tax authority may determine that we owe additional VAT.
We evaluate our tax positions and establish liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, developments in case law, and closing of statute of limitations. Such adjustments are reflected in the income tax provision as appropriate. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. As of December 31, 2022, we had established a reserve of $41.9 million for uncertain tax positions. See “Item 4. Information on the Company — Business Overview — Regulations Related to Taxation.”
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Internet regulation in the countries where we operate is scarce, and several legal issues related to the internet are uncertain.
Most of the countries where we operate do not have specific laws governing the liability of e-commerce business intermediaries, such as ourselves, for fraud, intellectual property infringement or other illegal activities committed by individual users or third-party infringing content hosted on a provider’s servers. This legal uncertainty allows for different judges or courts to decide very similar claims in different ways and establish contradictory case law.
In addition, we are subject to a variety of laws, decrees and regulations across the countries where we operate that affect e-commerce, electronic or mobile payments, tourism, data collection, data protection, privacy, anti-money laundering, taxation (including VAT or sales tax collection obligations), obligations to provide certain information to certain authorities about transactions which are processed through our platforms or about our users and those regulations applicable to consumer protection and businesses in general. However, it is not clear how existing laws governing issues such as general commercial activities, property ownership, copyrights and other intellectual property issues, taxation (including tax laws that require us to provide certain information about transactions consummated through our platforms or about our users) and personal privacy apply to online businesses. Many of these laws were adopted before the internet was available and, as a result, do not contemplate or address the unique issues of the internet.
Moreover, due to these areas of legal uncertainty, and the increasing popularity and use of the internet and other online services, it is possible that new laws and regulations will be adopted with respect to the internet or other online services. If laws relating to these issues are enacted, they may have a material adverse effect on our business, results of operations and financial condition.
We are subject to laws relating to the collection, use, storage and transfer of personally identifiable information about our users, especially financial information. Several jurisdictions have regulations in this area, and other jurisdictions are considering imposing additional restrictions or regulations.
Because our services are accessible worldwide, other foreign jurisdictions may claim that we are required to comply with their laws. Laws regulating internet companies outside of the Latin American jurisdictions where we operate may be more restrictive to us than those in Latin America. In order to comply with these laws, we may have to change our business practices or restrict our services. We could be subject to penalties ranging from criminal prosecution, significant fines, or outright bans on our services for failure to comply with foreign laws.
We process, store and use personal information, card payment information and other consumer data, which subjects us to risks stemming from possible failure to comply with governmental regulation and other legal obligations.
In our business, we use personal information, card payment information and other consumer data from users of our website and mobile applications. There are numerous laws regarding privacy and the storing, sharing, use, processing, transfer, disclosure and protection of personal information, card payment information and other consumer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection. It is possible, however, that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or the practices of the company. Any failure or perceived failure by us, or our service providers, to comply with the privacy policies, privacy-related obligations to users or other third parties, or privacy related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information, payment card information or other consumer data, may result in governmental enforcement actions, litigation or public statements against the Company by consumer advocacy groups or others and could cause our travel customers and members to lose trust in our Company, as well as subject us to bank fines, penalties or increased transaction costs, all of which could have an adverse effect on our business.
The regulatory framework for privacy issues is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet have recently come under increased public scrutiny. Countries in Latin America are increasingly implementing new privacy regulations, resulting in additional compliance burdens and uncertainty as to how some of these laws will be interpreted.
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Amendment to existing tax laws or regulations or enactment of new unfavorable tax laws or regulations could adversely affect our business and results of operations.
Many of the underlying laws or regulations imposing taxes and other obligations were established before the growth of the digital economy. If the tax or other laws or regulations were amended, or if new unfavorable laws or regulations were enacted, our tax payments or other obligations could increase, prospectively or retrospectively, which may subject us to interest and penalties, decrease the demand for our products and services if we pass on such costs to our travel customers, result in increased costs to update or expand our technical or administrative infrastructure or effectively limit the scope of our business activities if we decided not to conduct business in particular jurisdictions. As a result, these changes could have an adverse effect on our business or results of operations.
Governments could adopt tax laws that increase our tax rate or tax liabilities or affect the carrying value of deferred tax assets or liabilities, including the termination of tax-free incentives or termination of treaties for the avoidance of double taxation. Any changes to tax laws could impact the tax treatment of our earnings and adversely affect our profitability. Our effective tax rate in the future could also be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, or changes in the valuation of deferred tax assets and liabilities.
In addition, we have benefited from, and continue to benefit from, certain tax exemptions and incentive programs in various jurisdictions in which we have operations. When any of our tax exemptions or incentive programs expire or terminate, or if the applicable government withdraws or reduces the benefits of a tax exemption or incentive that we enjoy, our tax expense may materially increase and this increase may have a material impact on our results of operations.
Our tax liabilities in the future may also be adversely affected by changes to our operating structure, changes in the mix of revenue and earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax balances, or the discontinuance of beneficial tax arrangements in certain jurisdictions.
We continue to work with relevant governmental authorities to clarify our obligations under existing, new and emerging tax laws, rules and regulations. However, due to the increasing pace of legislative changes and the scale of our business activities, any substantial changes in tax policies, enforcement activities or legislative initiatives may materially and adversely affect our business, financial condition and results of operations, and the taxes we are required to pay.
We are subject to anti-corruption and economic sanctions laws and regulations in the jurisdictions in which we operate, and failure to comply with these laws and regulations could negatively impact our business, our results of operations, and our financial condition.
We are subject to a number of anti-corruption and economic sanctions laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and regulations administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). Failure to comply with these laws and regulations could negatively impact our business, our results of operations, and our financial condition.
The FCPA and similar anti-bribery laws generally prohibit companies and their intermediaries from making improper payments or improperly providing anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or keeping business and/or other benefits. The FCPA also requires maintenance of adequate record-keeping and internal accounting practices to accurately reflect transactions. Under the FCPA, companies operating in the United States may be held liable for actions taken by their strategic or local partners or representatives. Other jurisdictions in which we operate have adopted similar anti-corruption, anti-bribery and anti-kickback laws to which we are subject.
Economic sanctions and embargo laws and regulations, such as those administered and enforced by OFAC, vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations.
Civil and criminal penalties may be imposed for violations of these laws. We operate in some countries which are viewed as high risk for corruption and/or economic sanctions issues. Despite our ongoing efforts to ensure compliance with the FCPA and similar laws, and economic sanctions laws and regulations, there can be no assurance that our officers, directors, employees, agents, and third-party intermediaries will comply with those laws and our policies, and we may be ultimately held responsible for any such non-compliance. If we or our officers or directors violate such laws or other similar laws governing the conduct of our business (including local laws), we or our officers or directors may be subject to criminal and
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civil penalties or other remedial measures, which could harm our reputation and have a material adverse impact on our business, financial condition and results of operations. Any investigation of any actual or alleged violations of such laws could also harm our reputation or have an adverse impact on our business, financial condition and results of operations.
We are, and may be in the future, involved in various legal proceedings, the outcomes of which could adversely affect our business and results of operations.
We are, and may be in the future, involved in various legal proceedings relating to allegations of our failure to comply with consumer protection, labor, tax or antitrust regulations, that could involve claims or sanctions for substantial amounts of money or for other relief or that might necessitate changes to our business or operations.
Our websites contain information about hotels, flights, popular vacation destinations and other travel-related topics. It is possible that if any information, accessible on our websites, contains errors or false or misleading information, third parties could take action against us for losses incurred in connection with the use of such information. In addition, because consumer protection laws in many of our markets provide for joint liability, travel customers may bring claims against us for a failure or deficiencies in the provision of a travel product or service by one of our suppliers that is outside of our control.
The defense of any of these actions is, and may continue to be, both time-consuming and expensive. We cannot assure you that we will prevail in these legal proceedings or in any future legal proceedings and if such disputes were to result in an unfavorable outcome, it could result in reputational damage and have a material adverse effect on our business, financial condition and results of operations. For a discussion of certain key legal proceedings relating to us, see “Item 4. Information on the Company — Business Overview — Legal Proceedings.”
We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.
We protect our brands and domain names by relying on trademark and domain name registration in accordance with laws in Latin America. We have also entered into confidentiality and invention assignment agreements with our employees and certain contractors, as well as confidentiality agreements with certain suppliers and strategic partners, in order to protect our technology and content. We own our technology platform, which consists of applications that we develop in-house using primarily open source software. We have not registered our technology, however, because we believe it would be difficult to replicate and that it is adequately protected by the agreements we have in place. Additionally, our technology is constantly evolving and any registration may run the risk of protecting outdated technology. Even with these precautions, it may be possible for another party to copy or otherwise obtain and use our intellectual property without our authorization or to develop similar intellectual property independently. Effective trademark protection may not be available in every jurisdiction in which our services are made available, and policing unauthorized use of our intellectual property is difficult and expensive. Any misappropriation or violation of our rights could have a material adverse effect on our business.
Furthermore, we may need to go to court or other tribunals to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. These proceedings might result in substantial costs and diversion of resources and management attention.
We currently license from third parties some of the technologies, trademarks and content incorporated into our websites. As we continue to introduce new services that incorporate new technologies, third ’party trademarks and content, we may be required to license additional technologies, third ’party trademarks and content. We cannot be sure that such technologies and content licenses will be available on commercially reasonable terms, if at all.
Third parties may assert that our services, products and technology, including software and processes, violate their intellectual property rights. As competition in our industry increases and the functionality of technology offerings further overlaps, such claims and counterclaims could increase. We cannot assure you that we do not or will not inadvertently infringe on the intellectual property rights of third parties. Any intellectual property claim against us, regardless of its merit, could have an adverse effect on our business, financial condition and results of operations and could be expensive and time consuming to defend. Our failure to prevail in such matters could result in loss of intellectual property rights, judgments awarding substantial damages and injunctive or other equitable relief against us, or require us to delay or cease offering services or reduce features in our services.
Increased labor costs, compliance with labor laws and regulations and failure to maintain good relations with labor unions may adversely affect our results of operations.
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We are required to comply with extensive labor regulations in each of the countries in which we have employees, including with respect to wages, social security benefits and termination payments. If we fail to comply with these regulations, we may face labor claims and government fines.
In the past, governments from certain countries in which we operate, including Argentina, have adopted laws, regulations and other measures requiring companies in the private sector to increase wages and provide specified benefits to employees. We cannot assure you that these governments will not do so again in the future. In addition, some of our employees in Argentina, Brazil and certain other countries are currently represented by labor unions. We may face pressure from our labor unions or otherwise to increase salaries.
Due to high levels of inflation and full employment in the tech industry, we expect to continue to raise salaries. If future salary increases in the Argentine peso or the currencies of other countries in which we have employees exceed the pace of the devaluation of those currencies, such salary increases could adversely affect our business, results of operations and financial condition.
Moreover, while we have enjoyed satisfactory relationships with labor unions that represent our employees, labor-related disputes may still arise. Labor disputes that result in strikes or other disruptions could adversely affect our business, financial condition and result of operations.
A failure to comply with current laws, rules and regulations or changes to such laws, rules and regulations and other legal uncertainties may adversely affect our business, results of operations or business growth.
We have been subject, and we will likely be subject in the future, to inquiries from time to time from regulatory bodies concerning compliance with consumer protection, tax, labor, antitrust and travel industry-specific laws and regulations.
Such inquiries have included investigations and legal proceedings relating to the travel industry and, in particular, parity provisions in contracts between hotels and travel companies, including us, as well as allegations of “geopricing” or “geoblocking practices.” See "Item 4. Information on the Company—Business Overview—Legal Proceedings” for more information. Parity provisions are significant to our business model, and their removal or modification may adversely affect our business, financial condition and results of operations. We are unable at this time to predict the timing or outcome of these various investigations and lawsuits, or similar future investigations or lawsuits, and their impact, if any, on our business and results of operations.
The failure of our businesses to comply with these laws and regulations could result in fines and/or proceedings against us by governmental agencies and/or consumers, which if material, could adversely affect our business, financial condition and results of operations. Further, if such laws and regulations are not enforced equally against other competitors in a particular market, our compliance with such laws may put us at a competitive disadvantage vis-à-vis competitors which do not comply with such requirements.
Complaints from travel customers or negative publicity about our services can diminish consumer confidence and adversely affect our business.
In the past, government and consumer protection agencies have received a substantial number of complaints about our products, which represent a small percentage of our total transactions but could increase in the future. Many of these claims are related to the behavior of our suppliers. From time to time, we are involved in disputes or regulatory inquiries that arise in the ordinary course of business. The number and significance of these disputes and inquiries have increased as our business has expanded. We have responded to inquiries from regulatory agencies; however, we are likely to receive inquiries in the future, which may lead to actions against us. If during these inquiries we were found to violate any laws or to constitute unfair business practices, we could be subject to civil damages, enforcement actions, fines or penalties. Such actions or fines could require us to restructure our business processes in ways that would harm our business and cause us to incur substantial costs.
Because volume and growth in the number of new travel customers are key drivers of our revenue and profitability, travel customers’ complaints or negative publicity about our customer service could severely diminish consumer confidence and use of our services. Measures we sometimes take to combat risks of fraud and breaches of privacy and security can damage relations with our travel customers. To maintain good customer relations, we need prompt and accurate customer service to resolve irregularities and disputes. Effective customer service requires significant personnel expense and investment in developing programs and technology infrastructure to help customer service representatives carry out their functions. These expenses, if not managed properly, could significantly impact our profitability. Failure to manage or train our customer
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service representatives properly, could compromise our ability to handle our travel customer’s complaints effectively. In addition, if we do not handle travel customer complaints effectively, our reputation and brand may suffer and we may lose our travel customers’ confidence.
Consumer adoption and use of mobile devices creates new challenges.
Widespread adoption of mobile devices, coupled with the web browsing functionality and development of apps available on these devices, is driving substantial online traffic and commerce to mobile platforms. We have experienced a significant shift of business to mobile platforms and our suppliers are also seeing a rapid shift of traffic to mobile platforms.
Many of our competitors and new market entrants are offering mobile apps for travel products and other functionality, including proprietary last-minute discounts for accommodation reservations. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. The average price of travel products purchased in mobile transactions may be less than a typical desktop transaction due to different consumer purchasing patterns. Further, given the device sizes and technical limitations of tablets and smartphones, mobile consumers may not be willing to download multiple apps from multiple companies providing a similar service and instead prefer to use one or a limited number of apps for their mobile travel activity. As a result, the consumer experience with mobile apps as well as brand recognition and loyalty are likely to become increasingly important. Our mobile offerings drive a material and increasing share of our business. We believe that mobile bookings present an opportunity for growth and are necessary to maintain and grow our business as consumers increasingly turn to mobile devices instead of a desktop computer. As a result, it is increasingly important for us to develop and maintain effective mobile apps and websites optimized for mobile devices to provide consumers with an appealing, easy-to-use mobile experience. If we are unable to continue to innovate rapidly and create new, user-friendly and differentiated mobile offerings and advertise and distribute on these platforms efficiently and effectively, or if our mobile offerings are not used by consumers, we could lose considerable market share to existing competitors or new entrants and our business, financial condition and results of operations could be adversely affected.
Moreover, we are dependent on the compatibility of our app with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our products’ functionality or give preferential treatment to competitive products could adversely affect the usage of our app on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our users to access and use our app on their mobile devices, or if our users choose not to access or use our app on their mobile devices or use mobile products that do not offer access to our app, our user growth and user engagement could be harmed.
We rely on Expedia for substantially all of the hotel and other lodging products that we offer for all countries outside Latin America.
Substantially all hotel and other lodging products that we offer through our platform for all countries outside Latin America are provided to us by affiliates of Expedia pursuant to the Expedia Outsourcing Agreement. In addition, Expedia is the preferred provider to us of hotel and other lodging products in Latin America. For more information on our relationships with Expedia, see “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions— Relationship with Expedia.”
If Expedia’s affiliates cease to provide us with their hotel and other lodging products, we may be unable to offer these products to our users for some time and it might be difficult for us to replace this supply in the short term, which would negatively affect our business, financial condition and results of operations.
Pursuant to the Expedia Outsourcing Agreement, Expedia pays monthly marketing fees to us, which are calculated as a percentage of the gross booking value of the bookings that we sourced through Expedia during that month. We are required to maintain a level of bookings through Expedia such that those marketing fees equal at least $5.0 million in a six-month period; otherwise, Expedia may require us to pay a $125.0 million termination fee. The agreement allows us to source a limited percentage of our hotel bookings outside of Latin America without Expedia and from certain pre-agreed properties. However, if such transactions exceed the agreed percentage threshold during a six-month period, we may be required to pay compensation to Expedia; and if our non-Expedia sourced bookings outside of Latin America exceed the agreed percentage of gross bookings outside of Latin America for two consecutive quarters, or a higher agreed percentage threshold in one quarter, Expedia may elect to become our exclusive provider outside of Latin America once again. If such
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transactions exceed the agreed percentage of the minimum bookings set forth therein for any three consecutive months or any three months within a six-month period, then Expedia may require us to pay a $125.0 million termination fee.
The Expedia Outsourcing Agreement may also be terminated by Expedia, and we may be required to pay the termination payment, if the termination by Expedia is for our material breach of certain terms under the agreement or our Shareholder Agreements. In addition, Expedia may unilaterally terminate the Expedia Outsourcing Agreement in the event of a change of control of our Company. Moreover, if the hotel and other lodging products provided by Expedia were to suffer a deterioration in scale or quality, or if their pricing were not attractive, the products and services that we offer to our users would be adversely affected. The Expedia Outsourcing Agreement may be terminated by us unilaterally beginning from July 18, 2023 upon payment of a $125.0 million termination payment to Expedia. Consequently, if a deterioration in the scale or quality of the products and services provided exclusively to us by affiliates of Expedia were to occur, or if their pricing were not attractive, we may continue to be limited from terminating the Expedia Outsourcing Agreement.
We may experience constraints in our liquidity and may be unable to access capital when necessary or desirable, either of which could adversely affect our financial condition.
The majority of our cash balance is held in U.S. dollars. Foreign currency exposure is minimized by managing natural hedges, such as netting the Company’s current assets and current liabilities denominated in the same foreign currencies, by managing short term loans and short term investments and engaging in forward contracts for hedging purposes.
Although we believe we have a sufficient level of cash and cash equivalents to cover our working capital needs in the ordinary course of business for at least the next twelve months, we may, from time to time, explore additional financing sources and means to improve our liquidity and lower our cost of capital, which could include equity, equity-linked and debt financing and factoring activities. In addition, from time to time, we review acquisition and investment opportunities to further implement our business strategy and may fund these investments with bank financing, the issuance of debt or equity or a combination thereof.
The availability of financing depends in significant measure on capital markets and liquidity factors over which we exert no control. In light of periodic uncertainty in the capital and credit markets, we can provide no assurance that sufficient financing will be available on desirable or even any terms to improve our liquidity, fund investments, acquisitions or extraordinary actions or that our counterparties in any such financings would honor their contractual commitments, which in turn could negatively affect our business, results of operations and financial condition. In addition, if we raise funding through the issuance of new equity or equity-linked securities, it would dilute the percentage ownership of our then existing shareholders.
As conditions are uncertain and changing rapidly, we cannot assure you that our business will not require additional funds for operating activities in the future, particularly if the effects of the pandemic persist, nor can we assure you that we will be able to access new funding on favorable terms or at all.
Our business experiences seasonal fluctuations and quarter-to-quarter comparisons of our results may not be meaningful.
Our business experiences fluctuations, reflecting seasonal variations in demand for travel services. We generally experience seasonal fluctuations in the demand for our travel services, which affects our revenues in a quarter to quarter basis. The seasonal revenue impact is exacerbated with respect to income by the nature of variable cost of revenue and direct sales and marketing costs, which is typically realized in closer alignment to booking volumes, and the more stable nature of fixed costs.
The continued growth of international operations or a change in product mix may influence the typical trend of the seasonality in the future, and there may also be business or market driven dynamics that result in short-term impacts to revenue or profitability that differ from the typical seasonal trends.
As a result, quarter-to-quarter comparisons of our results may not be meaningful. Moreover, seasonal fluctuations in our results of operations could result in declines in our share price that are not related to the overall performance and prospects of our business.
The use of derivative financial instruments may adversely affect our results of operations, particularly in a volatile and uncertain market.
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From time to time, we enter into derivative transactions to manage our risks associated with currency exchange rates and interest rates. Significant changes may occur in our portfolio of derivative instruments due to increasing volatility and the fluctuation of the currencies of certain countries where we operate, including Brazil, Mexico and Argentina, against the dollar and volatility in the relevant interest rates, and we may incur net losses from our derivative financial instruments. The fair value of the derivative instruments fluctuates over time as a result of the effects of future interest rates and exchange rates. These values must be analyzed in connection with the underlying transactions and as a part of our total average exposure to interest rate and exchange rate fluctuations. It is difficult to predict the magnitude of the risk resulting from derivative instruments because the appreciation is imprecise and variable. We may be adversely affected by our derivative financial positions.
Increased focus on our environmental, social and governance responsibilities have and will likely continue to result in additional costs and risks, and may adversely impact our reputation, employee retention and willingness of customers and partners to do business with us.
Institutional, individual, and other investors, proxy advisory services, regulatory authorities, consumers and other stakeholders are increasingly focused on environmental, social, and governance (“ESG”) practices of companies. As we look to respond to evolving standards for identifying, measuring, and reporting ESG metrics, our efforts may result in a significant increase in costs and may nevertheless not meet investor or other stakeholder expectations and evolving standards or regulatory requirements, which may negatively impact our financial results, our reputation, our cost of capital, our ability to attract or retain employees, our attractiveness as a service provider, investment, or business partner, or expose us to government enforcement actions, private litigation, and actions by stockholders or stakeholders.
Our ability to achieve ESG goals and initiatives is subject to numerous risks including: (1) the availability and cost of limiting or eliminating our use of carbon-based energy sources and technologies; (2) evolving regulatory requirements affecting ESG standards or disclosures; (3) our ability to work with partners and providers that can meet our sustainability, diversity, and other standards; (4) our ability to recruit, develop, and retain diverse talent; (5) the impact of our organic growth and acquisitions or dispositions of businesses or operations on our ESG goals; and (6) customers’ actual demand for ESG-oriented product offerings, which may be more expensive and less available than other options.
The standards for tracking and reporting on ESG matters are relatively new, have not been harmonized, and continue to evolve. The disclosure frameworks we choose to align with may change from time to time and may result in a lack of consistent or meaningful comparative data from period to period. Ensuring there are systems and processes in place to comply with the various ESG tracking and reporting obligations will require management time and expense. In addition, our processes and controls may not always comply with evolving standards for identifying, measuring, and reporting ESG metrics, our interpretation of reporting standards may differ from those of others and such standards may change over time, any of which could result in significant revisions to our goals or reported progress in achieving such goals.
If our ESG practices do not meet evolving investor or other stakeholder expectations and standards or regulatory requirements, then our reputation, our ability to attract or retain employees, and our attractiveness as an investment, business partner, or investor could be negatively impacted. Similarly, our failure or perceived failure to pursue or fulfill our goals, targets and objectives or to satisfy various reporting standards within the timelines we announce, or at all, could also have similar negative impacts and expose us to government enforcement actions, private litigation, and actions by stockholders or stakeholders.
Our business may be adversely affected by climate change.
Climate change could adversely impact our business in the short, medium and long term. Impact may be direct by disruptions to travel and to our operations due to more frequent or severe storms, hurricanes, flooding, rising sea levels, shortages of water, droughts and wildfires. Moreover, we could be indirectly impacted by a change in consumer preferences or as a result of a general perception of travel as an environmental harm.
Additionally, there is uncertainty around the climate-related emerging laws and reporting requirements and the related costs to comply with the emerging regulations, which may be significant.
Risks Related to Latin America
Latin American countries are subject to political and social instability.
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Political and social developments in Latin America, including the results of elections, government deadlock, instability, civil strife, terrorism, high levels of crime, expropriations and other risks of doing business in Latin America could impact our business, financial condition and results of operations.
Although political and social conditions in one country may differ significantly from another country, events in any of our key markets could adversely affect our business, financial condition or results of operations.
Latin American countries have experienced periods of adverse macroeconomic conditions.
Our business is dependent upon economic conditions prevalent in Latin America. Latin American countries have historically experienced economic instability, including uneven periods of economic growth as well as significant downturns. As a consequence of economic conditions in global markets and lower commodity prices and demand for commodities, many of the economies of Latin American countries have recently slowed their rates of growth, and some have entered recessions. Since our business is dependent on discretionary consumer spending, which is influenced by general economic conditions, any prolonged economic downturn in any of our key markets could have adverse effects on our business, financial condition and results of operations.
Latin American governments have exercised and continue to exercise significant influence over their economies.
Governments in Latin America frequently intervene in the economies of their respective countries and occasionally make significant changes in policy and regulations. Governmental actions have often involved, among other measures, nationalizations and expropriations, price controls, currency devaluations, mandatory increases on wages and employee benefits, capital controls and limits on imports.
Our business, financial condition and results of operations may be adversely affected by changes in government policies or regulations, including such factors as exchange rates and exchange control policies; inflation control policies; price control policies; consumer protection policies; import duties and restrictions; liquidity of domestic capital and lending markets; electricity rationing; tax policies, including tax increases and retroactive tax claims; and other political, diplomatic, social and economic developments in or affecting the countries where we operate.
In the future, the level of intervention by Latin American governments may continue or increase. We cannot assure you that these or other measures will not have a material adverse effect on the economy of each respective country and, consequently, will not adversely affect our business, financial condition and results of operations.
Inflation, and government measures to curb inflation, may adversely affect Latin American economies.
Many of the countries in which we operate have experienced, or are currently experiencing, high rates of inflation. For example, the inflation rate in Brazil, as reflected by the Broad Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or “IPCA”), published by the IBGE, was 4.6% in 2020, 10.1% in 2021 and 5.8% on 2022. In Mexico, the inflation published by the INEGI was 3.2%, 7.4% and 7.8% in 2020, 2021 and 2022 respectively. In Argentina, according to measurements from INDEC of the national consumer price index, cumulative consumer price inflation (Inflacion Acumulada de Precios al Consumo) for 2020 was 36.1%, for 2021 was 50.9% and for 2022 was 94.8%.
Inflation in Brazil, Mexico and Argentina could increase our costs of operations and impact our financial condition and results of operations. Inflation rates may continue to increase in the future, and the government measures to control inflation, adopted presently or in the future, remain uncertain. Measures taken by the governments of these countries to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and retarding economic growth. Inflation, measures to combat inflation and public speculation about possible additional actions have contributed materially to economic uncertainty in many of these countries.
Exchange rate fluctuations against the dollar in the countries in which we operate could negatively affect our results of operations.
Local currencies used in the conduct of our business are subject to depreciation and volatility. The currencies of many countries in Latin America have experienced significant volatility in the past, particularly against the dollar. For example, the Brazilian real depreciated 29% and 7.3% during 2020 and 2021, respectively, and appreciated 5.2% during 2022; the Mexican peso depreciated 5.2% and 3.1% during 2020 and 2021, respectively, and appreciated 4.9% during 2022; and the Argentine peso depreciated 40.5%, 22.1% and 64.4% during 2020, 2021 and 2022, respectively.
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If the dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions will typically result in increased revenue and operating expenses, and our revenue and operating expenses will typically decrease if the dollar strengthens. Moreover, if the dollar strengthens against the foreign currencies of countries in which we operate, the purchasing power of our travel customers from those countries could be negatively affected by potentially increased prices in local currencies, and we could experience a reduction in the demand for our travel services, particularly with respect to international travel.
Additionally, foreign exchange exposure also arises from pre-pay transactions, where we accept upfront payments for bookings in the travel customer’s home currency, but payment to the hotel is not due until after the travel customer checks out and is paid by us in the hotel’s home currency. We are therefore exposed to foreign exchange risk between the time of the initial reservation and the time when the hotel is paid.
We attempt to minimize our foreign currency exposures by managing natural hedges, netting our current assets and current liabilities in the same foreign currencies, and managing short term loans and investments for hedging purposes. Additionally, from time to time we enter into derivative transactions. However, depending on the size of the exposures and the relative movements of exchange rates, if we choose not to hedge or fail to effectively hedge our exposure, we could experience a material adverse effect on our financial condition and results of operations.
We are subject to foreign currency exchange controls in certain countries in which we operate.
Certain Latin American economies have experienced shortages in foreign currency reserves and their respective governments have adopted restrictions on the ability to transfer funds out of the country and convert local currencies into dollars. For example, Brazilian law provides that whenever there is a serious imbalance in Brazil’s balance of payments or reason to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil. Further, exchange controls implemented by the Argentine government control and restrict the ability of companies and individuals to exchange Argentine pesos for foreign currencies and their ability to remit foreign currency out of Argentina. We cannot assure you that the Central Bank of Argentina or other government agencies will not increase those controls or restrictions, or make modifications to these regulations or establish more severe restrictions on currency exchange, which could affect our ability to make payments to foreign creditors or providers, or make dividend payments to foreign shareholders. We cannot assure you that foreign exchange controls in Brazil, Argentina or any other country where we operate, may not reemerge or worsen in the future to prevent capital flight, counter a significant depreciation of the Brazilian real, Argentine peso or other currency, or address other unforeseen circumstances. Additional controls could have a negative effect on the ability of our operating entities in the affected country to access the international credit or capital markets.
As a result of these exchange controls, markets in Argentina developed trading mechanisms in which an entity or individual buys U.S. dollar denominated securities in Argentina (e.g., shares, sovereign debt) using Argentine peso, and subsequently sells the securities for U.S. dollars, in Argentina, to access U.S. dollars locally, or outside Argentina, by transferring the securities abroad, prior to being sold (the latter commonly known as "Blue Chip Swap Rate"). The Blue Chip Swap Rate has diverged significantly from Argentina’s official exchange rate (commonly known as exchange spread). In recent years, the Blue Chip Swap Rate has been higher than Argentina’s official exchange rate. As of December 31, 2022, 2021 and 2020, the spread of the Blue Chip Swap was 94.2%, 96.8% and 66.7%, respectively. For a discussion of certain foreign exchange regulations applicable to us, see “Item 10. Additional Information — D. Exchange Controls.”
Any shortages or restrictions on the transfer of funds from abroad may impede our ability to convert these currencies into dollars and to transfer funds, including for the payment of dividends or debt. Moreover, such restrictions limit our ability to use funds for operating purposes in other countries. Consequently, if we are prohibited from transferring funds out of the countries in which we operate, our business, financial condition and results of operations could be adversely affected.
Those kinds of exchange controls could have a material adverse impact on our operations, business, financial condition and results of operations. It is uncertain whether the Brazilian and/or Argentine governments will or will not increase such controls or restraints which could affect the ability to make payments to foreign creditors or suppliers, and dividend payments to shareholders.
Developments in other markets may affect Latin America.
The market value of companies like us may be, to varying degrees, affected by economic and market conditions in other global markets. Various Latin American economies have been adversely impacted by the political and economic events that occurred in several emerging economies in recent times.
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As of the date of this Annual Report, recent global developments have occurred in the world which could impact the economies of the Latin American countries in which we operate and consequently have an adverse effect on our business, financial condition and results of operations, such as any new restrictions on travel, immigration or trade.
Developments of a similar magnitude to the international markets in the future can be expected to adversely affect the economies of Latin American countries and, therefore, us.
Risks Related to our Ordinary Shares
The strategic interests of our significant shareholders may, from time to time, differ from, and conflict with, our interests and the interests of our other shareholders.
If L. Catterton, Expedia, or other investors acquire or continue to own and control, directly or indirectly, a significant portion of our voting share capital, even if their respective interests represent less than a majority of our total voting share capital, such shareholders may be able to exert influence over decisions at both the shareholder and board level of our Company. For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
The strategic interests of our significant shareholders may differ from, and conflict with, our interests and the interests of our other shareholders in material respects. In addition, our memorandum and articles of association provides that Expedia and any of our directors affiliated with Expedia do not have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate.
Expedia also competes in the global travel industry, and also acts as a supplier to us and certain of our competitors. For a further description of our relationship with Expedia, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” “Item 3. Key Information — D. Risk Factors — Risks Related to our Business—We rely on Expedia for substantially all of the hotel and other lodging products that we offer for all countries outside Latin America,” and “Item 16G. Corporate Governance—Differences in Corporate Law.”
We cannot assure you that the actions of Expedia and other significant shareholders, will not conflict with our interests or the interests of our other shareholders.
We are a foreign private issuer under U.S. securities regulations and, as a result, we are not subject to U.S. proxy rules and we are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. issuer.
We report under the Exchange Act as a non-U.S. company and a “foreign private issuer,” as such term is defined under U.S. securities regulations. Because we qualify as a foreign private issuer, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (1) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (2) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (3) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K upon the occurrence of specified events. In addition, we are not required to file our Annual Report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their Annual Report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, even though we are required to furnish reports on Form 6-K disclosing whatever information we have made or are required to make public pursuant to BVI law or distribute to our shareholders and that is material to our Company, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
We are exempt from certain corporate governance requirements of the New York Stock Exchange.
We are exempt from certain corporate governance requirements of the New York Stock Exchange, by virtue of being a foreign private issuer. The standards applicable to us are considerably different from the standards applied to U.S. domestic issuers. For instance, we are not required to:
•have a majority of our board of directors be independent;
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•have a compensation committee or a nominating or corporate governance committee;
•have regularly scheduled executive sessions with only non-management directors;
•have an executive session of solely independent directors each year; or
•adopt and disclose a code of business conduct and ethics for officers, directors and employees.
For more information, see “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management.” We have relied on and intend to continue to rely on some of these exemptions. As a result, you may not be provided with the benefits and protections of certain corporate governance requirements of the New York Stock Exchange.
The requirements of being a public company may strain our resources and distract our management.
As a public company, we are subject to the reporting requirements of the Exchange Act and requirements of the Sarbanes-Oxley Act applicable to a foreign private issuer. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure and internal controls and procedures, we need to commit significant resources, potentially hire additional staff and provide additional management oversight. We have implemented additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth will also require us to commit additional management, operational and financial resources to identify new professionals to join our Company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We are a “foreign private issuer,” as such term is defined under the Securities Act, and, therefore, we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under the Securities Act, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 30, 2023.
In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer such as the Annual Report on Form 10-K. We will also have to mandatorily comply with U.S. federal proxy requirements, and our executive officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers. Such transition and modifications will involve additional costs and may divert our management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
Any failure to maintain an effective system of internal controls may result in material misstatements of our consolidated financial statements or cause us to fail to meet our reporting obligations or fail to prevent fraud; and in that case, our shareholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our ordinary shares.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish a report by our senior management on our internal control over financial reporting. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over
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financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Effective internal controls are necessary for us to provide reliable and accurate financial reports on a timely basis and prevent fraud. If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or on a timely basis or prevent fraud; and in that case, our shareholders could lose confidence in our financial reporting or we could be sanctioned by the SEC, which would harm our business and could negatively impact the price of our ordinary shares. While we believe that we have sufficient personnel and review procedures to allow us to maintain an effective system of internal controls, we cannot provide assurance that we will not experience potential material weaknesses in our internal control. Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our future reporting obligations.
Future issuances of our ordinary or other classes of shares may cause a dilution in your shareholding.
We may raise additional funding to meet our working capital, capital expenditure requirements for our planned long-term capital needs, or to fund future acquisitions. If such funding is raised through issuance of new equity or equity-linked securities, it may cause a dilution in the percentage ownership of our then existing shareholders.
From time to time we may grant equity-based compensation to our management and employees, which may dilute the value of your ordinary shares.
From time to time we may grant equity-based compensation to our management and employees, which may dilute the value of your ordinary shares. Pursuant to the Amended and Restated 2016 Stock Incentive Plan, we may grant restricted stock units (“RSUs”) and stock options to our officers, directors and/or employees. We issue new shares to satisfy the exercise or release of stock-based awards.
During 2022, 2021 and 2020 we granted an aggregate of 622,781, 723,908 and 1,409,680 RSUs to certain of our directors, senior management and other personnel. During 2022, 2021 and 2020, we did not grant any stock options. For more information about our equity-based compensation, see “Item 6. Directors, Senior Management and Employees — B. Compensation.” If our board of directors approves the issuance of new equity incentive plans (or the issuance of additional shares under the existing equity incentive plans), the interests of other shareholders may be diluted.
If securities or industry research analysts do not publish or cease publishing research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, our stock price and trading volume could decline.
The trading market for our ordinary shares will rely in part on the research and reports that securities and industry research analysts publish about us, our industry and our business. We do not have any control over these analysts. Our stock price and trading volumes could decline if one or more securities or industry analysts downgrade our ordinary shares, issue unfavorable commentary about us, our industry or our business, cease to cover us or fail to regularly publish reports about us, our industry or our business.
An active or liquid trading market for our ordinary shares may not be maintained and the price of our ordinary shares may fluctuate significantly and your investment may decline in value.
An active, liquid trading market for our ordinary shares may not be maintained in the long term. Loss of liquidity could increase the price volatility of our ordinary shares. Moreover, we cannot assure you that investors will be able to sell ordinary shares should they decide to do so.
Furthermore, the stock markets in general, and the shares of emerging market and technology companies in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies involved. We cannot assure you that any trading price or valuation will be sustained. These factors may materially and adversely affect the market price of our ordinary shares, which may limit or prevent investors from readily selling our ordinary shares and may otherwise affect liquidity, regardless of our operating performance.
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Market fluctuations, as well as general political and economic conditions in the markets in which we operate, such as recession or currency exchange rate fluctuations, may also adversely affect the market price of our ordinary shares. Following periods of volatility in the market price of a company’s securities, that company may often be subject to securities class-action litigation. This kind of litigation may result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business, financial condition and results of operation.
The sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.
Sales of substantial amounts of our ordinary shares in the public market, or the perception that such sales could occur, could adversely affect the market price of our ordinary shares, even if there is no relationship between such sales and the performance of our business.
A portion of our ordinary shares are currently held by affiliates, which means they may not be sold unless the sale is registered under the Securities Act, other than if an exemption from registration is available. Certain of our shareholders have demand and/or other piggyback registration rights which may enable them to sell some or all of their ordinary shares in a public offering in the United States registered under the Securities Act. For more information, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”
Investors may have difficulty enforcing judgments against us, our directors and management.
We are incorporated under the laws of the BVI and many of our officers and directors reside outside the United States. Moreover, many of these persons do not have significant assets in the United States. As a result, it may be difficult or impossible to effect service of process within the United States upon these persons, or to recover against us or them on judgments of U.S. courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws.
Furthermore, our memorandum and articles of association include an exclusive jurisdiction clause pursuant to which, to the fullest extent permitted by applicable law, (i) other than claims specified in clause (ii) below and except as may otherwise be expressly agreed between the Company and a shareholder or between two or more shareholders in relation to the Company, we and all our shareholders agree that the BVI courts shall have exclusive jurisdiction to hear and determine all disputes of any kind regarding us and shareholders’ respective investments in us, irrevocably submit to the jurisdiction of the BVI courts, irrevocably waive any objection to the BVI courts being nominated as the forum to hear and determine any such dispute, and undertake and agree not to claim any such court is not a convenient or appropriate forum; and (iii) the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, in each case unless our board of directors consents in writing to the selection of an alternative forum.
An award of punitive damages under a U.S. court judgment based upon U.S. federal securities laws is likely to be construed by BVI courts to be penal in nature and therefore unenforceable in the BVI. Further, no claim may be brought in the BVI against us or our officers and directors in the first instance for violation of U.S. federal securities laws because these laws have no extraterritorial application under BVI law and do not have force of law in the BVI.
However, a BVI court may impose civil liability, including the possibility of monetary damages, on us or our officers and directors if the facts alleged in a complaint constitute or give rise to a cause of action under BVI law. Moreover, it is unlikely that a court in the BVI would award damages on the same basis as a foreign court if an action were brought in the BVI or that a BVI court would enforce foreign judgments if it viewed the judgment as inconsistent with BVI practice or public policy.
The courts of the BVI would not automatically enforce judgments of U.S. courts obtained in actions against us or our officers and directors, or some of the experts named herein, predicated upon the civil liability provisions of the U.S. federal securities laws, or entertain actions brought in the BVI against us or such persons predicated solely upon U.S. federal securities laws. Further, there is no treaty in effect between the United States and the BVI providing for the enforcement of judgments of U.S. courts in civil and commercial matters, and there are grounds upon which BVI courts may decline to enforce the judgments of U.S. courts. Some remedies available under the laws of U.S. jurisdictions, including remedies available under the U.S. federal securities laws, may not be allowed in the BVI courts if contrary to public policy in the BVI. Because judgments of U.S. courts are not automatically enforceable in the BVI, it may be difficult for you to recover against us or our officers and directors based upon such judgments.
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Certain types of class or derivative actions generally available under U.S. law may not be available as a result of the fact that we are incorporated in the BVI and the exclusive jurisdiction clause included in our memorandum and articles of association. As a result, the rights of shareholders may be limited.
Shareholders of BVI companies may not have standing to initiate a shareholder derivative action in a court of the United States. Furthermore, our memorandum and articles of association include an exclusive jurisdiction clause which, to the fullest extent permitted by applicable law, will act as a bar to any such action in a court of the United States. In any event, the circumstances in which any such action may be brought, if at all, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The BVI courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law or to impose liabilities against us, in original actions brought in the BVI, based on certain liability provisions of U.S. securities laws that are penal in nature.
You may have more difficulty protecting your interests than you would as a shareholder of a U.S. corporation.
Our corporate affairs are governed by the provisions of our memorandum and articles of association, as amended and restated from time to time, and by the provisions of applicable BVI law. The rights of shareholders and the fiduciary responsibilities of our officers and directors under BVI law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.
These rights and responsibilities are to a large extent governed by the BVI Business Companies Act, 2004 as amended from time to time (the “BVI Act”) and the common law of the BVI. The common law of the BVI is derived in part from judicial precedent in the BVI as well as from English common law, which has persuasive, but not binding, authority on a court in the BVI. In addition, BVI law does not make a distinction between public and private companies and some of the protections and safeguards (such as statutory pre-emption rights, save to the extent expressly provided for in the memorandum and articles of association) that investors may expect to find in relation to a public company are not provided for under BVI law.
There may be less publicly available information about us than is regularly published by or about U.S. issuers. Also, the BVI regulations governing the securities of BVI companies may not be as extensive as those in effect in the United States, and the BVI law and regulations regarding corporate governance matters may not be as protective of minority shareholders as state corporation laws in the United States. Therefore, you may have more difficulty protecting your interests in connection with actions taken by our officers and directors or our principal shareholders than you would as a shareholder of a corporation incorporated in the United States.
The laws of BVI provide limited protections for minority shareholders, so minority shareholders will not have the same options as to recourse in comparison to the United States if the shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the BVI there is limited statutory protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protections under BVI statutory law are derivative actions, actions brought by one or more shareholders for relief from unfair prejudice, oppression and unfair discrimination and/or to enforce the BVI Act or the memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the memorandum and articles of association and are entitled to payment of the fair value of their respective shares upon dissenting from certain enumerated corporate transactions. For more information, see “Item 10. Additional Information — B. Memorandum and Articles of Association” and “Item 16G. Corporate Governance — Differences in Corporate Law” below.
There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the BVI is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to seek to have the affairs of the company conducted properly according to law and the constitutional documents of the company. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum
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and articles of association, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following: (i) a company is acting or proposing to act illegally or beyond the scope of its authority; (ii) the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained; (iii) the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or (iv) those who control the company are perpetrating a “fraud on the minority.”
These rights may be more limited than the rights afforded to minority shareholders under the laws of states in the United States.
We have no current plans to pay any cash dividends on our ordinary shares.
We currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares are likely to be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our ordinary shares if the trading price of our ordinary shares increases. While pursuant to our memorandum and articles of association our Series A Preferred Shares and Series B Preferred Shares are entitled to semi-annual dividends and quarterly dividends, respectively, our memorandum and articles of association do not require us to pay any dividends on our ordinary shares.
Anti-takeover provisions in our memorandum and articles of association might discourage, delay or prevent acquisition or other change of control attempts for us that you and/or other of our shareholders might consider favorable.
Certain provisions of our memorandum and articles of association may discourage, delay or prevent a change in control of our Company or management that shareholders may consider favorable, including but not limited to the following provisions:
Pursuant to our memorandum and articles of association:
•Our board of directors may without prior notice to shareholders, or obtaining any shareholder approval, amend our memorandum and articles of association to authorize and subsequently issue an unlimited number of preferred shares in one or more classes and series and designate the issue prices, rights, preferences, privileges, restrictions and terms of such preferred shares.
•Our board of directors is currently made up of seven directors divided into three classes, with each class having a three-year term. Class I’s, Class II’s and Class III’s terms will expire at the Company’s annual meetings in 2024, 2025 and 2023, respectively. The only circumstance in which shareholders can elect new directors is at an annual meeting and in respect of those board seats whose term is expiring at the annual meeting. Elections will take place by plurality voting. Shareholders do not have the power to increase or reduce the size of the board or fill a vacancy on the board, which matters are the exclusive authority of our board of directors.
•Our shareholders may only remove directors for cause and only by resolution approved by shareholders holding not less than two-thirds of the voting rights at a meeting of shareholders called for the stated purpose of removing the director.
•There are a number of restrictions, conditions and other requirements (including advance notice period requirements) that apply to our shareholders’ ability to (i) request special meetings of our shareholders; (ii) nominate persons for election as directors at annual meetings of our shareholders; and (iii) propose other items of business or other matters for consideration at any annual or special meetings of our shareholders.
•All resolutions of the shareholders must be adopted at a meeting of our shareholders convened in accordance with our memorandum and articles of association. Shareholders are prohibited from adopting resolutions by written consent.
•There are restrictions on amending our memorandum and articles of association. Certain provisions of our memorandum and articles of association (including many of the provisions described above) may only be amended with the approval of both our shareholders and our board of directors. Provisions that may be amended by the shareholders without board approval require the affirmative vote of holders of two-thirds of the shares entitled to vote on the resolution.
For more information on our Shareholder Agreements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” For more information on our memorandum and articles of association, see “Item 10.
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Additional Information—Memorandum and Articles of Association” and “Item 16G. Corporate Governance—Differences in Corporate Law.”
These provisions and other provisions under BVI law could discourage, delay or prevent potential takeover attempts and other transactions involving a change in control of our Company, including actions that our shareholders may deem advantageous. As such, these provisions may reduce the price that investors might be willing to pay for our ordinary shares in the future and negatively affect the trading price of our ordinary shares.
ITEM 4 INFORMATION ON THE COMPANY
A.History and Development of the Company
Despegar.com, Corp. was formed as a business company incorporated in the BVI on February 10, 2017. On May 3, 2017, the stockholders of our predecessor, Decolar.com, Inc., a Delaware corporation, exchanged their shares for ordinary shares of Despegar.com, Corp. to create a BVI holding company. Following the exchange, Decolar.com, Inc. became a wholly-owned subsidiary of Despegar.com, Corp.
Our principal executive office is located at Avenida Jujuy 2013, Ciudad Autónoma de Buenos Aires, Argentina C1247ABI, Telephone: +54 11 5173-3702. Our agent for service of process in the United States is Cogency Global Inc., located at 10 E. 40th Street, 10th Floor, New York, New York 10016.
Our History and Development
Our business has grown substantially in revenue, products and geographic scope since launching in 1999. The following table shows the timeline of key milestones:
| 1999 | • Launched site in Argentina. | ||||
| 2000 | •Launched sites in Brazil, Chile, Colombia, Mexico and Uruguay. | ||||
| 2001 | •Launched sites in the United States and Venezuela. | ||||
| 2007 | •Launched site in Peru. | ||||
| 2009 | • Expanded our offerings to include hotels. • Launched sites in Bolivia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Nicaragua, Panama, Paraguay and Puerto Rico. | ||||
| 2010 | • Launched sites in El Salvador and Honduras, reaching our 20th market. • Cumulative one million travel customers served. | ||||
| 2012 | • Launched our mobile apps on Android and iOS. • Expanded offerings to include packages, rental cars and cruise products. | ||||
| 2013 | •Reached one million downloads of our mobile app. • Expanded our offerings to include destination services. • Expanded hotel offerings to include vacation rentals. | ||||
| 2014 | • Cumulative 10 million travel customers served. • Our mobile app is included in the iTunes Store’s “Best of 2014”. • Launched travel affiliates program. • Expanded our offerings to include travel insurance and travel assistance. | ||||
| 2015 | • Reached 10 million downloads of our mobile app. • Deepened strategic partnership with Expedia, including its equity investment in our Company. | ||||
| 2016 | • Awarded “E-commerce Leader in the Tourism Industry in LATAM” by the Latin American E-Commerce Institute. • Expanded our destination service offerings to include our local concierge product. | ||||
| 2017 | • Initial public offering and listing on the New York Stock Exchange. | ||||
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| 2018 | • Launched sales call centers in Peru, Ecuador, Mexico, Chile, Colombia, Argentina and Brazil. • Developed tour operation business. | ||||
| 2019 | • Completed rebranding our core business, including logos, website and images in order to update our outward facing content. • Acquired Viajes Falabella in Chile, Argentina, Peru and Colombia. •Entered into a co-branding agreement with Banco Santander to launch a co-branded credit card under our loyalty program in Brazil. | ||||
| 2020 | •Acquired Best Day, a leading travel agency in Mexico. • Acquired an 84% equity stake in Koin, an online payment platform in Brazil. • Entered into a ten-year commercial partnership agreement with Tarjeta Naranja, the leading branded proprietary credit card issuer in Argentina and a subsidiary of Grupo Financiero Galicia. | ||||
| 2021 | • Entered into a co-branding agreement with Banco Invex to launch a co-branded credit card under our loyalty program in Mexico. • Published our first corporate sustainability report, which constitutes a first step in the Company’s ESG process. •Launched our loyalty program in Mexico, through which customers have access to exclusive discounts and collect points that can be exchanged for our services. The loyalty program marked the one-million-member milestone during 2021. | ||||
| 2022 | •Acquired Viajanet, one of the leading online travel agencies in Brazil. •Acquired a 51% ownership stake in Stays.net, Brazil’s leading vacation rental channel manager and a preferred software partner for leading international booking platforms to offer vacation rentals. • Acquired the remaining 16% equity from minority shareholders of Koin. •Reached 12.1 million members of Loyalty Program. •Launched Viajes Falabella app. •Relaunched Best Day app | ||||
Capital Expenditures
See “Item 5. Operating and Financial Review and Prospects—C. Research and Development, Patents and Licenses.”
B.Business Overview
Overview
We are the leading online travel company in Latin America, mainly known by our two brands, Despegar, our global brand, and Decolar, our Brazilian brand. In Mexico we are also known by our brands Best Day, BD Experience and HotelDo, which we acquired in October 2020. In Chile, we are also known by the brand Viajes Falabella, an offline travel agency with online presence, acquired in June 2019, for which we currently have a license. Koin is our online payment and consumer lending services platform in Brazil, which we acquired in August 2020. During 2022, as part of our regional consolidation strategy, we acquired Viajanet and a 51% ownership stake in Stays, further enhancing our B2C and B2B offerings.
We have a comprehensive product offering, which we organized into three segments: (1) Air, which consists of the sale of airline tickets, (2) Packages, Hotels and Other Travel Products, which consists of travel packages (which can include airline tickets and hotel rooms), as well as stand-alone sales of hotel rooms (including vacation rentals), car rentals, bus tickets, cruise tickets, travel insurance and destination services, and (3) Financial Services, which consists of point-of-sale installment loans and "Buy Now, Pay Later" services, which enable our customers as well as customers of third-party merchants to make online purchases and pay off interest bearing debt in installments, and of fraud prevention services.
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We believe that our focus on the underpenetrated Latin American online travel market, our knowledge of the consumer and supplier landscape in the region, in combination with our ability to manage the business successfully through economic cycles as well as our leading technology platform, will allow us to consolidate our market position and continue to expand our industry leadership. In 2022, 2021 and 2020, we had approximately 3.9 million, 3.3 million and 2.3 million travel customers, generating respectively $533.5 million, $322.0 million and $131.2 million in revenues of our travel business.
Our gross bookings were $4.3 billion, $2.5 billion and $1.4 billion during 2022, 2021 and 2020, respectively. Our results of operations for 2021 and 2020 were affected by the COVID-19 pandemic, which has significantly impacted the global travel industry.
Our total payment volume was $75.7 million and $30.4 million during 2022 and 2021, respectively. During 2020 our total payment volume was not material. We generated $4.4 million, $0.8 million and $0.1 million in our financial services segment revenues in 2022, 2021 and 2020, respectively.
The Latin America online travel bookings are expected to continue growing in the coming years, as the effects of the COVID-19 pandemic have subsided. Factors driving the growth in online travel bookings include the increase of internet penetration, further adoption of smartphones, tablets and other mobile devices and a growing middle class with greater access to banking services and credit products, together enabling a larger segment of the growing population to transact online or on mobile devices.
The Latin American travel industry is characterized by significant fragmentation in suppliers across airlines, hotels and other travel products. This fragmentation is compounded by regional complexities, including differences in language, local customs, travel preferences, currencies and regulatory regimes across the more than 30 countries in the region. These factors create challenges for suppliers to reach customers directly and, consequently, create a significant market opportunity for us.
We believe we have the broadest travel portfolio among OTAs in Latin America, with inventory from global suppliers, including over 250 airlines, over 650,000 hotels and 436,000 vacation rentals, as well more than 1,000 car rental agencies and approximately 800 destination services suppliers with more than 13,000 activities. Our business benefits from network effects: our large travel customer base helps us to attract additional travel suppliers and, in turn, a larger network of travel suppliers helps us to attract new travel customers by enhancing our product offering. Additionally, as we continue to grow our marketplace, we are increasingly able to offer more competitive pricing and product availability to our travel customers as well as enhance the effectiveness of our marketing strategy.
We launched our award-winning mobile travel app in 2012 and it is an increasingly important part of our business, as it allows consumers to access and browse our real-time inventory, compare prices and transact through their mobile devices quickly. As of December 31, 2022, our apps have approximately 70.4 million cumulative downloads from the iOS App Store and Google Play, 17.4 million of which were downloaded in the last two years, and we believe they are the most downloaded OTA apps in Latin America. During each of 2022, 2021 and 2020, mobile accounted for approximately 73%, 72% and 71% of all of our visits to our touristic brands sites or apps, and approximately 50%, 50% and 45%, respectively, of our transactions were purchased on our mobile platform, complementing our desktop website traffic. As internet, smartphone and other mobile device penetration continue to increase, we believe that our strength in mobile will continue to be a strategic advantage.
Through mobile and online marketing, brand promotion and cross-marketing, we have created strong brand recognition among Latin America travelers, which we view as one of our key competitive advantages. To date, we have invested more than $1.6 billion in marketing and branding initiatives promoting our brand, which we believe combined with the quality of the service we have delivered over the years, has made us a trusted brand with our travel customers. In 2022, 2021 and 2020, 57%, 53% and 62% of our travel customers had completed previous purchases on our platform, respectively.
Travel Market Opportunity in Latin America
Latin America is one of the largest and most diverse regions in the world. Comprised of over 30 countries with a total population of over 650 million, the region encompasses multiple languages, currencies and regulatory regimes. The travel market serving Latin American consumers presents a significant opportunity for us due to its large market size, highly fragmented base of travel suppliers and rapid growth in the adoption of technology-based solutions for consumers and travel suppliers. In addition, long-term favorable macroeconomic trends in the region have contributed to the expansion of the middle class and increased consumption in the region.
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In the second quarter of 2020, the travel market in Latin America –as in other parts of the world– came to a complete halt as a consequence of the COVID-19 pandemic and governments’ measures to limit the spread of the virus. Governments around the world, including in Latin America, imposed travel restrictions and bans, closed borders, established restrictions on public gatherings, instructed residents to practice social distancing, required closure of non-essential businesses, issued stay at home advisories and orders, implemented quarantines, mandated vaccinations and similar actions. During 2021 governments continued to adopt measures in response to new variants of the virus.
With the availability of vaccines and increasing familiarity with the virus, as well as the evolution of milder COVID-19 variants, most COVID-19 related travel restrictions have been lifted, and countries around the world have reopened their borders for foreign travel. However, a resurgence of new variants of the virus could have a significant impact on global economy and the travel industry in the future. Overall, the full duration and impact of the COVID-19 pandemic remains uncertain, and it is difficult to predict how the recovery will continue to unfold with respect to the travel industry and our business, going forward. The pandemic led to a significant decrease in per capita income and disposable income, increased and sustained unemployment, and a decline in consumer confidence, all of which significantly reduced discretionary spending by individuals and businesses on travel. In turn, these effects negatively impacted demand for travel services. In 2022, travel activity has increased significantly, however, travel activity has not yet reached pre-pandemic levels.
Overview of Suppliers in the Latin American Travel Industry
The Latin American travel industry is characterized by significant supplier fragmentation across airlines, hotels and other travel products. Regional complexities, including differences in language, local customs, travel preferences, currencies and regulatory regimes across the more than 30 countries in the region create challenges for travel suppliers to reach travel customers directly, at scale and across the region. Further driving this fragmentation is the growing number of smaller airlines, including low-cost airlines that have been commencing operation in recent years. Today, travel agencies are the leading distribution channel in the region for airlines, due to their ability to provide greater selection and scale across the region.
We believe that due to a lack of scale or unified brand, other travel services in Latin America are more fragmented.
Trends Driving Online Travel and Our Growth
An expanding and evolving travel market, coupled with greater internet, smartphone and other mobile device penetration, is expected to drive robust growth in online travel bookings in Latin America. As consumers shift to researching and booking travel online, travel suppliers have adapted their offerings and deepened their relationships with online marketing and booking channels, such as OTAs, to generate revenue. OTAs provide travel suppliers with scale and distribution into new and existing markets and 24/7 customer service and localization services, including language and payment capabilities.
Factors driving the growth in online travel include:
•Increasing internet penetration. While internet penetration in Latin America has increased, we believe it has substantial room for growth. As internet penetration increases, Latin American consumers are increasingly using the internet to research and purchase products, including travel.
•Increasing adoption of mobile devices, including smartphones. The use of mobile devices in Latin America is expected to continue to grow. With the proliferation of smartphones and tablets, mobile has become a prominent tool for travelers to search, discover and purchase travel services.
•Superior user experience. Online travel booking channels, which include websites and mobile apps, empower travelers to search products and user-generated reviews and easily compare real-time availability and pricing options from multiple travel providers simultaneously, which we believe leads to higher user engagement and customer conversion.
•Growth in banked consumers and proliferation of credit products. With the continued development of the Latin American economy, a larger portion of the population has opened bank accounts, enabling access to new forms of payments including credit cards and other financial products. With the increased number of consumers with bank and credit card accounts, more people have the ability to make purchases online. Access to bank accounts and credit cards also gives consumers access to additional financing options from banks, such as payment by installments.
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As the leading OTA in Latin America, we believe we are well positioned to succeed as consumers’ destination of choice for fast, easily searchable and more transparent travel research and shopping. As our market share grows, organically as well as inorganically, we are increasingly able to capture significant amounts of customer data including travel history and preferences and serve personalized recommendations to drive higher customer conversion. Additionally, we are able to provide better pricing through scale and by bundling multiple travel products together in a single offer.
Our Competitive Strengths
We are the leading OTA in Latin America, offering our travel customers a broad and diversified selection of travel products at attractive prices. Our leadership position is a result of our following core strengths:
Industry Leader in Latin America
With our launch in 1999, we have benefited from an early mover advantage in Latin America, which has allowed us to achieve significant scale and brand awareness. In 2022, 2021 and 2020, we had approximately 3.9 million, 3.3 million and 2.3 million travel customers, respectively, primarily in Latin America, generating $533.5 million, $322.0 million and $131.2 million in revenue for the travel business and approximately $4.3 billion, $2.5 billion and $1.4 billion in gross bookings.
We have established relationships with a large network of travel suppliers in Latin America and we have become the leading online air ticketing provider in Latin America, having sold approximately 17%, 22% and 19.6% of all airline tickets purchased through GDS in the region during 2022, 2021 and 2020, respectively, according to Amadeus. Additionally, we believe we provide our travel customers with the largest travel portfolio among Latin American OTAs, with access to over 250 global airlines, over 650,000 hotels globally and 436,000 vacation rentals as well as more than 1,000 car rental agencies and approximately 800 destination services suppliers with more than 13,000 activities. Also, we have accumulated approximately 3.2 million user-generated reviews in total as of December 31, 2022, of which 0.1 million were submitted in 2022, which we believe drive user engagement. Our platform is also of increasing importance to airlines based outside of Latin America, which generally have a limited local presence in the region, and which account for over 50% during 2022 of the outbound international travel booked on our platform. Such international travel is more attractive because of its price point and higher commission structure.
Our technology platform allows us to offer our travel customers the ability to create custom packages of two or more products, such as a combination of airfare and a hotel booking for a particular trip, allowing us to offer our travel customers lower combined prices that may not be available for individual products. We are also able to better cross-sell multiple travel products and provide travel customers with a comprehensive solution for their travel needs.
We benefit from network effects: our large travel customer base helps us to attract additional travel suppliers and, in turn, a larger network of travel suppliers helps us to attract new travel customers by enhancing our product offering. Furthermore, by growing our user base and aggregating different products from our supplier base, we are able to offer attractive pricing and availability of travel products to our travel customers as well as enhance the effectiveness of our marketing strategy.
Strong Brand Recognition and Awareness
Despegar, our global brand, and Decolar, our Brazilian brand, have leading brand awareness in online travel in key markets, including Brazil and Argentina. Best Day, BD Experience and HotelDo, which we acquired in October 2020, have a leading brand awareness in Mexico. In Chile, we are also known by the brand Viajes Falabella, an offline travel agency with online presence, acquired in June 2019, for which we currently have a license. We use the Koin brand for the financial services sector in Brazil since August 2020. During 2022, with our acquisitions, we have begun our travel B2C and B2B offerings in the travel sector under the brands Viajanet and Stays. According to search engine trend data that is based on the relative number of searches of brand related keywords on Google during 2022, approximately 17% of the searches in Latin America were related to our brand as compared to the other five competitors in the market.
Local Market Expertise and Leadership
We have a strong track record in Latin America, with a point of sale in 18 markets, representing 89% of the region’s population, and with a leading OTA presence in key markets such as Brazil, Mexico, Argentina, Chile, and Colombia. In our three largest markets, Brazil, Mexico and Argentina, we have operated for more than 20 years. Our knowledge of local consumers, and their buying patterns and travel preferences, as well as our ability to offer financing through our relationships with financial institutions, have enabled us to serve our travel customers more effectively than global
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competitors from outside the region. Furthermore, our extensive supplier relationships allow us to offer a greater scale and breadth of offerings than smaller, local competitors. We understand the objectives of, and challenges faced by, Latin American travel suppliers and we are well-positioned to address those challenges by helping the travel suppliers grow their businesses, all to the benefit of travel customers who receive more choice at attractive pricing.
As the leading Latin American OTA, we have developed long-standing relationships with a wide range of local banks to offer installment payment plans to their credit card holders as an alternative purchase option. We believe that local banks look to partner with us because of our scale, access to our online audience and high transaction volume. We believe this differentiates us from other local and global travel agencies as those agencies either do not offer installment plans or offer installment plans from a more limited selection of financing providers or in a more limited selection of countries. We believe our portfolio of installment plans is a meaningful driver of traffic to our platform as well as conversion. Furthermore, our financial services segment provides us with an additional type of payment which allows us to extend our product offering to a broader range of customers, primarily in Brazil. Approximately 43%, 46% and 56% of our prepaid transactions in 2022, 2021 and 2020 were paid in installments. Our agreements with local banks allow us to offer installment plans without assuming collection risk from the travel customer.
Leading Mobile Offering
Mobile is an increasingly important part of our business, as consumers are quickly able to access and browse our real-time travel offerings, compare prices and make purchases through their mobile devices. We launched our leading mobile travel apps in 2012. As of December 31, 2022, our mobile apps have more than 70.4 million cumulative downloads from the iOS App Store and Google Play (17.4 million of which were downloaded in the last two years). In addition, our iOS App Store and Google Play apps were rated 4.7 and 4.2 stars as of December 31, 2022. During 2022, 2021 and 2020, mobile, which includes both mobile web and our mobile apps, accounted for approximately 73%, 72% and 71% of all of our user visits, and approximately 50%, 50% and 45%, respectively, of our transactions. Additionally, transactions via mobile increased by approximately 16% in 2022 compared to 2021 and increased by approximately 43% in 2021 compared to 2020, mainly as a result of the effect of COVID-19 pandemic particularly in 2020. We continue to provide innovative features and functionality to consumers through our mobile apps, including push notifications, dynamic updates, inventory alerts and personalized promotions as well as in-app customer service. Our travel customers using mobile devices have historically made more repeat transactions than travel customers using desktop computers. Additionally, our mobile presence allows in-destination marketing, which facilitates cross-selling of additional travel products, such as rental cars and destination services to travel customers, after they have arrived at their destination.
Many of our travel customers use their mobile device to search for travel products but complete their transactions on their desktop. However, as mobile purchasing becomes increasingly prevalent in the region, we believe our award-winning mobile platform, coupled with the widespread adoption of our apps, positions us well for an increasingly mobile future.
Powerful Data and Analytics Platform
Our large web and mobile audience and transaction volume generate a significant amount of data that allows us to better understand our travel customers and provide personalized travel offerings and also helps us to drive our sales, marketing and operational strategy. To offer the most effective content and products for each travel customer, we extensively analyze the data we collect to identify and highlight the most valuable products and destinations in each travel customer interaction. By gathering and analyzing data in real-time, we are quickly able to assess and react to changes in travel customer behavior, market pricing and other market dynamics. Currently, the majority of visitors to our platform see a personalized landing page based on such factors as user account information, past search and purchasing history and geolocation. We believe that this personalization of the user experience increases engagement and likelihood of purchase.
Effective Marketing Capabilities
We have invested significant resources in our marketing team, which we believe is a significant driver of our business. Through our vertically-integrated, in-house marketing team, we are able to control all aspects of our budget, marketing campaigns and market analytics, without the need for agencies or external consultants. Our marketing team’s local knowledge and expertise in our key markets have allowed us to develop direct relationships with a broad range of local and regional media providers and purchase media directly, avoiding more costly intermediaries. We have invested in our own creative, production and media execution teams, who are quickly able to adapt our marketing strategy, while also leveraging our extensive data and analytics capabilities for more precise audience targeting. Furthermore, we have developed our own software platform for managing our search optimization capabilities, allowing us to tailor messages
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effectively for specific target markets and travel customers. We also developed our Despegar’s traveler benefits program, Pasaporte Decolar, in Brazil, Mexico, Argentina, Colombia and Ecuador, to increase customer loyalty, where customers accumulate points to be redeemed for travel benefits, including airline tickets and hotel stays.
Proven and Experienced Team
Our management team has significant experience in the travel sector and across a variety of industries in Latin America. Members of our management team have worked at organizations such as LATAM Airlines, McKinsey, PwC and Thales, among others. In addition to our management team, we have an extensive technology team including more than 950 developers and technology professionals. By fostering a distinctive, collaborative and high-performance working culture, we attract software developers with world-class talent and offer an engaging working environment for ongoing career development. We believe we are perceived as a top talent recruiter for IT professionals in Latin America, allowing us to attract the highest quality professionals and specialists dedicated to the enhancement of our platform.
Our Travel Customers
We had approximately 3.9 million, 3.3 million and 2.3 million travel customers in the years 2022, 2021 and 2020, respectively, primarily in Latin America. Our travel customers are primarily from Latin America traveling domestically within their own country of origin, to other countries in the Latin American region, and outside of Latin America. Most of our travel customers are traveling for leisure, although we do have some independent business travelers as well.
Our Products and Services
We offer a wide range of travel and travel-related products catering to the needs of Latin Americans traveling domestically within their own country of origin, to other countries in the Latin American region and outside of Latin America. We provide these travelers with the comprehensive tools and information, in multiple languages, that they need to research, plan, book and purchase travel products efficiently. That information includes approximately 3.2 million user-generated reviews over the last three years ended December 31, 2022, of which 0.1 million were submitted in 2022. We organize our business into three segments: (1) Air, which consists of the sale of airline tickets, (2) Packages, Hotels and Other Travel Products, which consists of travel packages (which can include airline tickets and hotel rooms), as well as stand-alone sales of hotel rooms (including vacation rentals), car rentals, bus tickets, cruise tickets, travel insurance and destination services, and (3) Financial Services, which consists of point-of-sale installment loans and "Buy Now, Pay Later" services, which enable our customers as well as customers of third-party merchants to make online purchases and pay off interest bearing debt in installments, and of payments' gateway and fraud prevention services. We mostly offer our products online through our website and mobile applications and use data and analytics to personalize the travel customer experience on our platform, based on geolocation, past search and purchasing history and social network interactions, which we believe increases engagement and likelihood of purchase.
Air
Through our Air segment, we offer airline tickets, primarily targeted at leisure travelers in Latin America, including travel domestically, to other countries in the region and outside of Latin America. Our Air segment includes airline tickets purchased on a stand-alone basis but excludes airline tickets that are packaged with other non-airline flight products. Our travel customers booked approximately 4.3 million, 3.6 million and 2.4 million transactions in our Air segment using our platform in 2022, 2021 and 2020, respectively.
We provide our travel customers with access to over 250 operating carriers. We believe our platform provides comprehensive information to our travel customers in a time efficient and transparent manner. Travel customers are quickly and easily able to evaluate a broad range of fares and airline combinations, and may search for flights based on their preferred travel dates, destinations, number of passengers, number of stops and class of travel, or they may use our more advanced search tool and include additional search parameters. Travel customers can also filter and sort the results of their search easily according to their preferences.
Packages, Hotels and Other Travel Products
The total number of transactions in our Packages, Hotels and Other Travel Products segment was 3.9 million, 3.2 million and 1.7 million in 2022, 2021 and 2020, respectively.
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Packages
We offer travelers the opportunity to create custom packages by combining two or more travel products, such as airline tickets and hotel, airline tickets and car rental or hotel and car rental, and booking them in a single transaction. Combining multiple products into a package with a single quoted price allows us to offer travel customers lower prices than are available for individual products and helps us to cross-sell multiple products in a single transaction.
Hotels
Through our platform, travel customers can search, compare and book reservations at more than 650,000 hotel’s globally through our direct network and third-party inventory. In addition, since 2013 our hotels offering includes vacation rentals.
Travel customers may search for hotels based on their destination and preferred dates for check-in and checkout, and may filter and sort our search results easily by selecting star ratings, specific hotel chains and location.
Travel customers can also indicate amenity preferences such as business services, internet access, fitness centers, swimming pools and more. Travel customers can also view hotel pictures and read hotel reviews from other travel customers on our platform. Our platform features approximately 3.2 million user-generated reviews over the last three years ended December 31, 2022, of which 0.1 million and 0.2 million were generated in 2022 and 2021, respectively.
As of December 31, 2022, approximately 26,000 of our hotel suppliers in Latin America were directly connected to our booking system. Through these direct connections, our hotel suppliers allocate rooms to us either by managing their room inventory directly on an extranet supported by us, or on an extranet supported by one of our more than 45 third-party channel managers.
In 2022, 2021 and 2020, 7.1%, 7.5% and 6.2%, respectively, of our gross bookings were attributable to supply provided to us by affiliates of Expedia. Expedia, the beneficial owner of 14.52% of our ordinary shares outstanding as of December 31, 2022, holds certain rights in its capacity as a shareholder. For more information on our relationship with Expedia, see “Item 7. Major Shareholders and Related Party Transactions —B. Related Party Transactions — Relationship with Expedia” and and Note 24 to our consolidated financial statements.
We typically do not assume inventory risk as we do not pre-purchase hotel room inventory from our hotel suppliers. Hotel suppliers are paid by one of two methods: “pre-pay” and “pay-at-destination.” Under the pre-pay model, our travel customer pays us at the time of booking, and we pay our hotel suppliers after the travel customer checks out. Under the pay-at-destination model, the travel customer pays the hotel directly at checkout and we either receive our commission later from the hotel suppliers or from the travel customer, at the time of booking. For the year ended December 31, 2022, 93% of the hotels booked in our platform were under the prepay model and 7% under the pay-at-destination model.
Vacation Rentals
We relaunched our Vacation Rentals products in all of our markets, brands, and channels. We have made a significant investment in both brand and performance campaigns to generate awareness around our new and improved product and its many benefits. Over the past year, we have undertaken vast redesigns in the shopping flow to offer a better experience to our clients. We have focused on meeting the specific needs of our customers when it comes to property details, amenities, and check-in instructions. This new and improved experience ensures that our clients can easily find the vacation rental for their holidays. Currently, we offer a vast selection of approximately 436,000 vacation rentals worldwide, mainly through our Expedia Outsourcing Agreement, our recent acquisition of Stays, and our direct sourcing efforts in Latin America. Our acquisition of Stays was finalized in July 2022 and platform integration was completed in October. This integration has already yielded positive results, with many direct contract listings executed during the first three months after completion of the integration.
Other Travel Products
We also offer other travel products on our platform. We provide our travel customers access to approximately 1,000 car rental agencies, approximately 800 destination services, suppliers with more than 13,000 activities, and one travel insurance supplier. While we offer both pre-pay and pay-at-destination options for car rentals, the other travel products that we offer must be prepaid.
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Destination Services: With the Best Day acquisition, we offer a wide range of in-destination services as an opportunity for us to offer attractions, tickets, tours and activities and local concierge services in more than 200 hotels, to package with other products and as a way to encourage in-destination transactions. The wide array of options offered is intended to suit varying budgets and preferences of potential travel customers. In order to guarantee the best experience, our team provides support and advice during the full customer’s journey.
B2B: Our B2B business offers technology, inventory, and operation to our partners. We developed robust white label solutions in all Latin American territories for banks, retail stores, hotels and airlines in which we offer all our products. We have B2B solutions for travel agencies through our HotelDO brand, application program interface ("API") for distributing our unrivaled Latin American hotels inventory for worldwide OTAs and wholesalers, and an affiliate platform for retail agencies with a one-stop shop travel products offering.
Car Rentals: Currently, we offer car rentals worldwide, with a focus in Latin America and the United States.
Travel Insurance: We offer travel insurance through a third-party provider in Latin America, Universal Assistance Card, with whom we entered into an exclusivity agreement in 2021. Travel customers can choose from a range of coverage options depending on their particular needs, such as medical insurance and lost or damaged baggage. Typically, this product is requested in conjunction with a flight and hotel booking. Prior to confirming and proceeding with the reservation of and payment for a flight or hotel booking or a package booking, our travel customers are offered the opportunity to purchase travel insurance.
Financial Services
Beginning in August 2020, through our subsidiary, Koin, we provide consumer lending services through its "Buy Now, Pay Later" solution that allows customers to finance their transactions through installments, on a simple to use platform, with accessible interest rates and no bureaucracy, thereby allowing them to have a higher purchasing power with limited requirements. Besides charging a fixed interest rate to the end-customers, Koin also charges a merchant discount rate (“MDR”) to the merchants for providing this payment alternative to their end-customers.
Besides the travel industry, Koin has commenced operating in some industries such as health-tech, ed-tech, home appliances, apparel, among others. Furthermore, Koin signed contracts with some large e-commerce platforms such as Vtex and Magento in order to increase its merchants base to commercialize its product with limited integration efforts. During 2021 and 2022, lending has been mostly limited to Despegar’s travel customers in Brazil.
In 2022, Koin processed over 200,000 transactions, and had over 145,000 customers. The average amount of each loan was approximately $375. For the year ended December 31, 2022, our total payment volume was $75.7 million. Most of our loan receivables are short-term in nature and repaid in a period ranging between seven and ten months, while a minor portion of loans are repaid within twenty-four months.
Complementing its payment solution, Koin also provides payments' gateway and anti-fraud services, enabling the integration of companies and suppliers. This service includes rules and machine learning, a flexible solution for companies that wish to integrate, chargeback guarantee, and BigData Cloud Based technologies.
Koin has in its portfolio partner companies from the most diverse retail sectors, from appliance stores to department stores and, tourism agencies. And more recently, Koin launched its own virtual credit card (VCC), which allows consumers to make their purchases safely, quickly, and with the possibility of financing in up to 12 installments. This VCC has the following advantages: (i) real-time credit approval; (ii) no annuity; (iii) does not use the conventional (traditional) credit card limit; and, (iv) no need to open a checking account at a bank.
Loans receivable represent loans granted to customers through our financial services business. Loan receivables are reported at their outstanding principal balances plus estimated collectible interest, net of allowances for uncollectible accounts. We typically place loans on non-accrual status as soon as the customer is due on its payments. Penalties and late interest fees are recognized as amounts are received. Accrual is restored when all overdue payments are settled by the customer.
We closely monitor credit quality for all loan receivables on a recurring basis. To evaluate a consumer seeking a loan, we use, among other indicators, a risk model internally developed, as a credit quality indicator to help predict the consumer’s ability to repay the principal balance and interest related to the credit. The risk model uses multiple variables as predictors of the consumer’s ability to repay the credit, including external and internal indicators. Internal indicators consider customer’s history with us, credit scoring and risk profile, among others. In addition, we consider external information to enhance the scoring model and the decision-making process. The internal indicators and the external credit score are combined in a risk matrix, which is also used to price the loans based on the risk profile.
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Payment Options
Credit cards are the primary means of payment for products on our platform. We allow for the use of more than one credit card in a single transaction, permitting travel customers with lower credit limits to make larger purchases. We also offer other payment alternatives including debit cards as well as several localized payment options available in the markets in which we operate.
We generally partner with banking institutions to allow our customers the ability to purchase the product of their choice through established financing plans offered and administered by banks, which we believe differentiates us from other companies in the financial sector that do not offer installment plans or offer them from a more limited selection of financing providers or in a more limited selection of countries. Local banks are looking to partner with us because of our scale, access to our online audience, and high transaction volume.
Credit card customers can choose from a range of installment plan offers and terms from different financial institutions with which the travel customer holds or obtains a credit card. Many of these installment offers are interest-free for the customer. Installment plans allow customers to make larger purchases than they can otherwise make in a single payment.
Banks bear the risk of fraud, delinquency or default by customers. When customers choose to finance their purchases, we typically receive payment under two scenarios: (i) full (complete) payment for our services within a short period of time after completion and confirmation of the purchase, regardless of the payment plan selected by the customer; or, (ii) we receive payment from the bank as installments become due, regardless of when the customer actually makes the scheduled payments.
In addition to traditional payment methods as the credit cards, Koin provides a “Buy Now, Pay Later” solution, which allows customers to pay their purchases in installments at the point of sale of the merchants, primarily in Brazil.
Marketing
We execute a multi-channel marketing strategy. We have created a long-standing brand that is associated with superior travel products, high quality services and competitive prices in Latin America. We have an experienced in-house marketing team dedicated to efficiently allocating resources across media channels. Key elements of our marketing strategy include:
In-house Teams. We have teams dedicated to: audiovisual content generation across online and offline channels; negotiation with media and agencies to control budget; performance trends and market analysis through strong data analytics; and targeted campaign monitoring.
Buy Direct. Through our direct relationships with key media suppliers throughout Latin America, we are able to secure highly competitive rates across the region.
Brand Building Strategy. We are active throughout the year with multiple marketing campaigns to build brand awareness. We use a multi-channel approach combining online, television, radio, print and other channels tailored to each country.
Cross-Device Insights and Custom Attribution Model and Bidding Tools. We measure marketing success across all media channels and devices by reconstructing the user’s marketing path across devices and applying our custom attribution model that feeds our optimization strategy. We have also developed proprietary tools to optimize our investment in search engine marketing (“SEM”) campaigns for Google AdWords by tracking sources of traffic and attributing a percentage of conversions to each event in a user’s marketing path.
Loyalty Program. We build customer loyalty through our rewards program, in which customers receive points when buying which can be redeemed in future purchases. Our program offers attractive benefits for customers.
Promotions and Sales. We focus aggressively on promotions including discounts, holiday campaigns and financing options. Our technology-driven marketing allows us to dynamically optimize promotions on a daily basis.
Affiliates
We have relationships with a network of approximately 7,000 affiliates, including travel agents, airlines, websites and other third parties such as online and offline retailers, in nine countries across Latin America. Our agreements with these affiliates allow them to access our product inventory directly through our platform or through our application program interface (“API”). We believe our affiliate program is attractive because we provide access to a range of travel products
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that our affiliates otherwise may not be able to access cost-effectively or at all. Our affiliates earn commissions from us depending on country and type of products sold. Furthermore, our affiliate program allows us to expand our footprint in Latin America and distribution network in a cost-effective manner.
Acquisitions
Acquisition of Best Day
In 2020, we acquired Best Day, a leading travel agency in Mexico, with business in Argentina, Colombia, Brazil, Uruguay, the Dominican Republic and the United States. The purchase price was fixed at $10.3 million, after application of net indebtedness and working capital adjustments. We settled certain contingencies which were indemnified by the sellers and accordingly we agreed to apply those indemnity obligations towards the purchase price. As of December 31, 2022 $3.7 million of the purchase price is outstanding. In addition, the agreement provides for an earnout for the benefit of certain sellers ranging from $0 to $20 million, based solely on the performance of our share price during a measurement period of six months prior to the fourth anniversary of the closing date. The earnout, if any, will be payable in cash on October 1, 2024.
Viajes Beda primarily operates in Mexico and to a lesser extent in South America, including Argentina, Brazil and Uruguay among others, and the United States. Transporturist primarily operates in Mexico. Best Day primarily provides travelers with several product offerings, including airline tickets, packages, hotels and other travel-related products, through its online platforms, call centers and offline presence, and provides travel suppliers a technology platform for managing the distribution of their travel products and access to traveler customers. Best Day also provides ground transportation services and group tours to travelers principally across the main tourist destinations in Mexico and the Dominican Republic. Best Day offers these travel products and services through its brands “Best Day” and “BD Experience”. In addition, Best Day offers hotel inventory, as well as transfers, activities, car rental, packages and tours to travel agencies through its tradename “HotelDo,” a leading hotel wholesale aggregator in Mexico and Latin America. Best Day also provides white label services for major travel vendors, including over 40 partnerships with key players in the travel industry—airlines, hotels, retails stores and banks.
We benefit from Best Day’s brand recognition in Mexico and synergies resulting from the combination of our businesses and technology platforms. Our increased size and presence in Mexico has also allowed us to obtain better terms from suppliers in Mexico and has made us a more attractive partner for suppliers to work with. We have, in addition captured synergies through the integration of Best Day into our business, which include marketing, expansion of in-destination products to other countries and cross-selling of in-destination products currently provided by Best Day to current customers, among others.
Acquisition of Koin
In August 2020, we completed the acquisition of an 84% equity interest in Koin. Koin is specialized in the consumer lending sector through its "Buy Now, Pay Later" solution which offers financing to merchants’ customers, predominantly in the travel sector in Brazil. On January 31, 2022, we acquired the remaining 16% equity stake in Koin for $3.2 million and, therefore, Koin is now a wholly-owned subsidiary.
Koin, a pioneer in the "Buy Now, Pay Later" landscape in Latin America provides, through one single integration, a solution that allows customers to finance their transactions in installments, on a simple to use platform, with accessible interest rates and no bureaucracy, thereby allowing them to have a higher purchasing power with limited requirements. In addition for merchants and e-commerce, Koin generates incremental sales by increasing conversion rates and by expanding our addressable market .
The travel industry is one of the largest markets for "Buy Now, Pay Later" offerings due to high average selling prices and due to Latin America’s growing adoption of e-commerce. Our acquisition of Koin adds to our value proposition as we expand the alternatives for our customers to purchase travel products with a payment option that doesn’t require a credit card or bank account.
We believe that we can capitalize on the services Koin provides, as Latin American e-commerce is one of the fastest growing business segments in the world, local customers are accustomed to pay in installments and there is a large percentage of the population underserved by traditional financial institutions.
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Acquisition of Ownership Stake in Stays.net
On July 1, 2022, we completed the acquisition of 51% ownership stake in Stays.net ("Stays"), Brazil’s leading vacation rental channel manager, for a total price of approximately $3.2 million.
Created in 2016, Stays currently offers a complete all-in-one solution (Channel Manager, Property Management System, ERP and integrated E-Commerce booking system) to vacation property managers and owners in Latin America. Stays is also a preferred integration partner of leading booking platforms worldwide. Stays currently has an inventory of more than 25,000 properties, mainly throughout Brazil. The acquisition of Stays gives us the opportunity to grow our vacation rental offering within Brazil as well as other key geographies in Latin America.
Acquisition of Viajanet
On June 1, 2022, we acquired TVLX Viagens e Turismo S.A. ("Viajanet"), one of the leading online travel agencies in Brazil for a total consideration of $14.0 million to be paid in installments, of which two are still pending (June 2024 and June 2025). Viajanet primarily operates in Brazil and provides travelers with several travel related products, such as domestic and international airline tickets through its online platform and call center.
The acquisition of Viajanet is our third acquisition in Brazil over the last two years, and it is another step in our regional consolidation strategy to enable us to deploy more of Despegar’s higher-margin non-air inventory through a new brand and its customer base while strengthening the team in Brazil.
We believe that we will be able to benefit from Viajanet’s brand recognition in Brazil and synergies resulting from the integration of Viajanet onto our technology platform which is more robust than Viajanet’s prior platform. We have already fully integrated Viajanet into our platform, which also allows us to expand Viajanet’s product offering and cross sell packages, hotels and other travel related products to Viajanet’s customer base.
Sales Call Centers
In 2018, we launched call center operations through third parties in various countries. We included our sales call number on the homepage of each website to complement our online platform, help us gain new travel customers and interact with those who might not be digitally enabled. We currently have call center operations for our Despegar, Decolar, Best Day, Viajes Falabella and Viajanet brands. These sales call centers were closed during the COVID-19 pandemic; however, starting January 2022, we re-opened our sales call centers for certain countries, including Mexico, Argentina and Brazil and launched new operations in certain other countries for our brands Despegar, Decolar, BestDay, Viajes Falabella and Viajanet. This channel has proven to be a useful tool in enhancing the value proposition to our customers by focusing on personalized advice and complete travel experiences. We expected this particular sales channel to remain a valuable as it enhances overall sales volumes.
We have recently launched a virtual sales advisor initiative in certain countries as we continue to provide innovative solutions to our customers and enhance our sales channels.
Customer Service
Customer experience is a key focus for our business and we believe this is reflected in our strong brand recognition and customer loyalty throughout Latin America. We emphasize providing personalized support throughout the customer purchase cycle, including automated web-based support and support from live customer service representatives.
In addition to our in-house customer service centers in Brazil, Mexico and Colombia, we rely on outsourced services to provide 24/7 support to our customers for issues that cannot be resolved through our platform. Outsourcing certain functions enhances cost controls while increasing operative flexibility.
During 2022 we implemented certain initiatives to improve our customer experience and post-sale net promoter score (“NPS”) to obtain better customer satisfaction, which we monitor regularly. For example, in 2022 we increased our NPS by 0.09% as compared to 2021.
Technology and Data
We use our technology platform to improve the travel customer experience and optimize the efficiency of our business operations. We have successfully built an innovative technology culture that we believe is unique in Latin America and
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enables us to attract and retain some of the best talent in the region. We employ more than 965 dedicated technology professionals. We actively recruit and train these highly-skilled technology professionals and many of our current technology managers started in our training program. Given the market demand for technology professionals, we have implemented a series of incentives to retain our highly-skilled technology professionals.
We own our technology platform, which is comprised of applications that we develop in-house using primarily open source software. Our technology team has adopted a continuous improvement, high-frequency testing approach to our business, aimed at improving both traffic and conversion rates, while maintaining reliability.
Our platform is engineered to provide a personalized and secure experience to our travel customers. We invest heavily in understanding our travel customers’ behavior and intentions through a combination of detailed behavioral data collection and machine learning algorithms. Our machine learning algorithms also help us detect fraud attempts. We collect, maintain and analyze behavioral data from all the devices our travel customers are using to interact with our platform. The insights derived from the analysis of this data form the basis of our enhanced conversion strategies. We use email, social media marketing and retargeting campaigns to remind travel customers of their searches.
We believe our technology can scale to accommodate significantly higher volumes of site traffic, customers, bookings and the overall growth in our business. We routinely test and expand the capacity of our servers so we are prepared to provide our travel customers with uninterrupted access to our sites during periods with high levels of user traffic, such as when we are offering promotions. Our information technology platform employs a horizontal architecture, which allows us to increase our processing capacity by adding more hardware in parallel with our existing servers. With this structure, we can grow our platform to accommodate the growth of our business with minimal disruption to the operation of our customer-facing platform and without having to replace our existing equipment.
Our system has been designed around an open architecture with a focus on robust reliability to reduce downtime in the event of outages or catastrophic occurrences. Our platform provides 24/7 availability, except during twice-monthly planned maintenance periods. Our system hardware, which we own, is hosted by a third-party data center in Miami, Florida, which also provides redundant communications lines and emergency power backup.
We believe our technology infrastructure is an important asset due to its robustness, cost-effectiveness and scalability. We continuously evaluate, research and develop new services, platforms infrastructure, and software to improve and solidify our technological systems further and provide a reliable, personalized, fast and secure experience to our travel customers.
For more information, see “—Intellectual Property” and “Item 3. Key Information — D. Risk Factors—Risks Related to Our Business—We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.”
Security, Privacy and Anti-Fraud
We are committed to operating a secure online business. We use various security methods in an effort to protect the integrity of our networks and the confidential data collected and stored on our servers. For example, we use firewalls to protect access to our networks and to the servers and databases on which we store confidential data; we restrict access to our network by virtual private network (“VPN”) with two-factor authentication and conduct periodic audits of data access and modifications of our network; and we use password-protected encryption technology to protect our communication channels and sensitive travel customer data. In addition, we have developed and use internal policies and procedures to protect the personal information of our travel customers, and we comply with the Payment Card Industry Data Security Standard (“PCI DSS”). To enforce our security framework we have a dedicated cybersecurity team that conducts penetration testing and application security analysis, develops policies and standards, and ensures compliance with those policies and standards.
We believe that issues relating to privacy and the use of personally identifiable information are becoming increasingly important as the internet and its commercial use continue to grow. We have adopted what we believe is a detailed privacy policy that complies with local legal requirements in each of the Latin American countries in which we operate and outlines the information that we collect concerning our users and how we use it. Users must acknowledge and expressly agree to this policy when registering with our platform, signing up for our newsletters, or making a purchase.
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Although we periodically send marketing communications to our users, we use our best efforts to ensure that we respect users’ communication preferences. For example, when users register with us, they can opt out of receiving marketing e-mails from us. Users can modify their communication preferences at any time in the “My Account” section of our sites.
We use information about our users for internal purposes in order to improve marketing and promotional efforts and in order to improve our content, product offerings and site layout. We may also disclose information about our users in response to legal requirements. Our information is stored on our servers located in Miami, Florida and on third party cloud services providers.
Moreover, we are committed to detecting and deterring possible instances of fraudulent transactions before they are completed. The key components of our fraud-prevention strategy include: (1) a dedicated and specialized fraud prevention team that works closely with our IT staff; (2) engagement with key actors in the online travel industry, such as banks and airlines, which strengthens our early-detection capabilities, thereby reducing the exposure period to potential fraud events; and (3) machine learning systems that analyze multiple factors, including intelligence gathered from our industry relationships, to help us adapt better to changing market conditions and detect and address fraudulent transactions. Our in-house team works with third-party vendors, allowing us to leverage best practices and scale quickly.
Competition
We operate in a highly competitive and evolving market. Travelers have a range of options, both online and offline, to research, find, compare, plan and book air, packages, hotels and other travel products.
Our competitors include:
•global OTAs with presence in Latin America, such as Booking.com and Expedia as well as travel metasearch sites;
•search websites and apps, such as Google and its travel businesses, and e-commerce and group buying websites and apps;
•alternative accommodation and vacation rental businesses, such as Airbnb;
•local offline travel agency chains and tour operators, such as CVC Brasil Operadora e Agência de Viagens; and
•smaller online travel agencies lacking a pan-regional presence.
In addition, our travel customers have the option to book travel directly with travel suppliers, including airlines, hotels and other travel suppliers via online and offline channels. See “Item 3. Key Information — D. Risk Factors—Risks Related to Our Business—We operate in a highly competitive and evolving market, and pressure from existing and new companies may adversely affect our business and results of operations” for more information.
We believe that the primary competitive factors in the travel industry, in particular as consumers increasingly research, plan and book travel online, are, among other things, brand recognition, price, availability and breadth of choice of travel services and products, customer service, ease of use, fees charged to travelers, accessibility, reliability and adoption of e-commerce by travelers in the markets in which we operate. We believe our brands, scale, operational and technological capabilities, including our local knowledge, marketing expertise and technology platform, provide us with a sustainable competitive advantage.
Intellectual Property
We regard our intellectual property as critical to our future success and rely on a combination of trademark laws and contractual restrictions to establish and protect our proprietary rights in our products. Our intellectual property includes trademarks and domain names associated with the names “Despegar”, “Despegar.com”, “Decolar”, “Decolar.com”, “Best Day”, “BD Experience”, “HotelDo”, “Viajanet”, “Stays” and “Koin”. To protect our platform and technology, we have entered into confidentiality and invention assignment agreements with our employees and certain contractors and suppliers. We own our technology platform, which consists of applications that we develop in-house using primarily open source software. We have not registered our technology, however, because we believe it would be difficult to replicate and that it is adequately protected by the agreements we have in place. Additionally, our technology is constantly evolving and any registration may run the risk of protecting outdated technology. We cannot assure you that all our intellectual property is fully protected and enforceable vis-à-vis third parties under all applicable laws in Latin America. For more information, see
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“Item 3. Key Information — D. Risk Factors—Risks Related to our Business—We may not be able to adequately protect and enforce our intellectual property rights; and we could potentially face claims alleging that our technologies infringe the property rights of others.”
Seasonality
See “Item 5. Operating and Financial Review and Prospects — Operating Results.”
Regulation
Regulations Related to the Travel Industry
The laws and regulations applicable to the travel industry affect us and our travel suppliers in the jurisdictions in which we operate, the jurisdictions in which our travel customers reside and the jurisdictions of their destinations. We are also required to be accredited by the International Air Transport Association (“IATA”) in order to promote and sell tickets for airlines connected to IATA.
Brazil
In addition to the standard licenses and permits required for all companies to operate in the travel industry in Brazil, we are subject to a specific registration for tourism providers with the Ministry of Tourism (“CADASTUR”). In Brazil, there are four main norms that govern the activities related to tourism, as well as the enrollment of services providers in the tourism industry: (i) Law No. 11,771/2008, which regulates the National Tourism Policy and defines the responsibilities of the federal government in planning, developing and stimulating the tourism sector; (ii) Decree No. 7,381/2010, which regulates Law No. 11,771/2008; (iii) Ordinance No. 38/2021 from the Ministry of Tourism, which establishes the CADASTUR, the CADASTUR’s consulting committee and regulates other measures; and (iv) Law No. 12,974/2014, which regulates the activities of tourism agencies.
Mexico
As a travel agency in Mexico, Bestday.com and Despegar.com.mx must be registered in the National Tourism Registry (Registro Nacional de Turismo or RNT) created by Decree dated June 26, 2015. The local regulation on commercial tourism activities is comprised of: (i) General Tourism Law and its regulations, which regulate tourism, as well as the processes derived from the activities carried out by the people during their trips and temporary stays in places other than their usual environment, with leisure purposes and other reasons; (ii) the resolutions issued by the Ministry of Tourism; and (iii) the Federal Consumer Protection Law and its regulations, which promote and protect consumer rights and culture and seek the equity, certainty and legal security between suppliers and consumers.
Argentina
As a travel agency in Argentina, Despegar.com.ar must be registered with the Registry of Travel Agents (Registro de Agentes de Viajes) in accordance with the provisions of by Section 5 of Decree No. 2,182/72. The local regulation on commercial tourism activities is comprised of: (i) Law 25,997 and its applicable regulation which governs the development and promotion of tourism in Argentina; (ii) Law 18,829 which defines the regulations applicable to travel agents; (iii) the resolutions issued by the Ministry of Tourism and Sports; and (iv) Law 24,240 as amended, which sets forth the provisions for the protection of consumers.
Regulations that apply to the E-Commerce Industry
We are also subject to a variety of laws, decrees and regulations that affect companies conducting business on the internet in the countries where we operate related to e-commerce, electronic or mobile payments; data collection; data protection; privacy; information requirements for internet providers; taxation (including VAT) or sales tax collection obligations); obligations to provide information to certain authorities; and other legislation which also applies to other companies conducting business in general. It is not clear how existing laws in Latin America governing issues such as general commercial activities, property ownership, copyrights and other intellectual property issues, taxation, consumer protection, digital signatures and personal privacy, apply to online businesses.
Some of these laws were adopted before the internet was available and, as a result, do not contemplate or address the unique issues of the internet. Due to these areas of legal uncertainty, and the increasing popularity and use of the internet
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and other online services in our markets, it is possible that new laws and regulations will be adopted with respect to the internet or other online services. These regulations could cover a wide variety of issues, including e-commerce; internet service providers’ responsibility for third-party content hosted in their servers; user privacy; electronic or mobile payments; pricing, content and quality of products and services; taxation (including VAT or sales tax collection obligations, obligation to provide certain information about transactions that occurred through our platform, or about our users); advertising; intellectual property rights; consumer protection and information security. See “Item 3. Key Information — D. Risk Factors—Risks Related to our Business—We process, store and use personal information, card payment information and other consumer data, which subjects us to risks stemming from possible failure to comply with governmental regulation and other legal obligations” and “Item 3. Key Information — D. Risk Factors—Risks Related to our Business—Internet regulation in the countries where we operate is scarce, and several legal issues related to the internet are uncertain” for more information.
Brazil
Resolution (Circular) issued by the Central Bank of Brazil No. 3,682 regulates the payment arrangement (arranjos de pagamento) services in Brazil (“Payment Arrangement Services Rule”). On July 27, 2017 and March 26, 2018, the Central Bank of Brazil revoked and amended certain provisions and included new provisions to the Payment Arrangement Services Rule, which introduced a definition of sub accrediting entities (subcredenciador) and determined that all participants of the payment arrangements should be subject to a centralized settlement system not later than September 28, 2018.
Pursuant to Payment Arrangement Services Rule, among other provisions, sub-accrediting entity is defined as a party of the payment arrangement that accredits a recipient to accept a payment instrument issued by a payment institution or a financial institution that is a party to the same payment arrangement, but that does not participate in the settlement process of transactions as creditor in relation to the issuer. The definition of sub-accrediting entity provided by the Payment Arrangement Services Rule is not precise enough to confirm that our Brazilian subsidiary would be subject to it. After carrying out several discussions with the Central Bank of Brazil, financial institutions and other participants involved in the payments arrangements, our Brazilian brand Decolar demonstrated to the Central Bank of Brazil that: (i) Resolution 3,682 does not apply to its business; (ii) Decolar should not be deemed a sub-accrediting institution; and (iii) it should not be obliged to integrate its activities into the payment arrangement Services, nor be subject to the payment arrangement rules issued by the Central Bank of Brazil, which on September 2018 issued a list of the entities and companies which should not be subject to Resolution 3,682 as well as their classification. Decolar has been classified as a non-subaccreditor, this is a simple business establishment, and not as a marketplace entity as provided in the Resolution.
Regulations Related to Consumer and Data Protection
We are subject to consumer and data protection laws in every country where we have a website.
Brazil Consumer Code Regulation
As an internet-based retailer, we are subject to several laws and regulations designed to protect consumer rights—most importantly the Consumer Protection and Defense Code (Law No. 8,078/1990, as amended), which regulates commercial practices, product and service liability, strict liability of the supplier of products or services, reversal of the burden of proof to the benefit of consumers, joint and several liability of all companies within the supply chain, abuse of rights in contractual clauses, and advertising and information on products and services offered to the public. The Consumer Protection and Defense Code establishes the legal framework for the protection of consumers, setting out certain basic rights, including the right to clear and accurate information about products and services offered in the consumer market, with correct specification of characteristics, structure, quality and price and the risks they pose. In addition, Executive Decree No. 7.962/13 applies with regards to retaining of service in an online environment. This legislation describes, among others, the rules on disclosure of information, consumer service, payment protection and other procedures for the rendering of online services.
Brazilian Data Protection Regulations
The Brazilian General Data Protection Law (Law No. 13,709/2018 – “LGPD”) was approved in August 2018 and became fully effective in August 2021. The LGPD is applicable to any individual or legal entity governed by public or private law processing personal data (i) in the Brazilian territory; or (ii) for the purposes of offering or supplying goods or services or treating information of data subjects located in Brazil; or (iii) if personal data has been collected in the Brazilian territory.
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According to the LGPD, personal data can only be processed (i) upon data subject consent; (ii) in compliance with statutory or regulatory obligations; (iii) by public administration; (iv) for development of studies by research entities; (v) by contractual and preliminary contractual relationship; (vi) for the exercise of rights in judicial, administrative or arbitration proceedings; (vii) for the protection of life and health; (viii) to legitimate interest of the controller; or (ix) for credit protection. The processing of sensitive personal data (e.g., regarding ethnic or racial origin, religion, political opinion or affiliation, health information, sexual orientation) is subject to a higher degree of scrutiny. The LGPD also provides liability obligations if damages occur while processing personal data in violation of the LGPD. In most cases we will process personal data in accordance with one or more of the LGPD requirements.
According to the LGPD, the eight situations in which the international transfer of data is allowed are: (i) when the data subject has provided specific and highlighted consent for such transfer; (ii) when countries or international organizations provide the appropriate level of protection of Personal Data established by Brazilian law; (iii) when controller provides and demonstrates safeguards of compliance with the principles, rights of the data subject and data protection regime established in the law, in the form of specific contractual clauses for a given transfer, among others; (iv) when the transfer is required for international legal cooperation between public bodies of intelligence; (v) when the transfer is required for life protection of the data subject or any third party; (vi) when the national authority authorizes such transfer; (vii) when the transfer results in a commitment undertaken under an international cooperation agreement; or (viii) when the transfer is required for enforcement of a public policy. Although the Data Protection Authority (ANPD) is fully operational and issuing guidelines and regulations, the international transfer of personal data is yet to be addressed. Although we treat personal data in strict accordance with applicable law, we continue to monitor regulation or guidance that may be issued by the ANPD.
In addition to the LGPD, there are other regulations in Brazil dealing with privacy and data protection, including: (i) the Brazilian Federal Constitution, which provides for the protection of individuals’ fundamental and inviolable rights of intimacy/privacy, private life and image, and that was recently amended to include data protection as a fundamental right as well; (ii) the Brazilian Civil Code (Law No. 10,406/2002, amended), which reaffirms the Federal Constitution’s provision of fundamental rights, and provides for the right to act against violators in order to cease the violation and seek compensation for suffered damage; (iii) the Consumer Protection and Defense Code, which provides for consumer-related databases, data collection and penalties related therewith; (iv) the Brazilian Internet Act (Law No. 12,965/2014, as amended), which establishes principles, guarantees, rights and obligations related to the use of the internet in Brazil; and (v) the Brazilian Internet Act Regulation (Decree No. 8,771/2016, as amended), which sets forth security standards to be complied with by internet connection and application providers (online platform operators) when storing personal data.
Brazilian consumer protection authorities and courts take the view that the express consent of the consumer must be obtained before the collection, processing, sharing and transmission of personal data. With regard to data collection, the Brazilian Internet Act provides that personal data collection, use, storage, sharing, transmission and processing must be previously and expressly authorized previously and expressly by the individual, consistent with the general privacy principle set forth by the Federal Constitution and Consumer Defense Code. For the purposes of Brazilian regulation, personal data is deemed to be any data related to an identified or identifiable individual.
Mexico
In Mexico, data protection is regulated by the Federal Law on Protection of Personal Data Held by Private Parties, which was published in the Official Gazette of the Federation (Diario Oficial de la Federación) on July 5, 2010. This law regulates, among other things, the type of information that can be collected, and how such information can be used. In addition, Federal Consumer Protection Law includes various rights and obligations regarding transactions carried out through electronic and other means. In April 2019, the Mexican Standard NMX-COE-001-SCFI-2018 was published which, although it is not mandatory, includes a list of recommendations with the best electronic commerce practices, including data security and protection.
Argentina
In Argentina, we are subject to e-commerce laws such as Resolution No. 104/05 adopted by the Ministry of Economy and the Argentine Consumer Protection Agency, which establishes certain information requirements for internet providers, and Law No. 25,326, as amended, and its corresponding regulations, which mandate the registration of databases with the Data Protection Agency and regulate, among other things, the type of information that can be collected, and how such information can be used.
Moreover, Law No. 24,240, as amended (the “Consumer Protection Law” or "CPL"), sets forth certain rules and principles designed to protect consumers, with the goal of mitigating the asymmetry between consumers and companies. The main provisions and general principles that service providers must comply with in accordance with the CPL are (i) providing
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complete and accurate information; (ii) keep the consumers safe from harm; (iii) be truthful and honest with respect to offers and advertising; (iv) treat the consumers fairly (i.e., refrain from discrimination); (v) comply with agreed Terms & Conditions; and (vi) not to cause damages to the consumer or their property.
The Argentine Secretary of Commerce, which is part of the Argentine Ministry of Economy, is the national enforcement authority of the Consumer Protection Law, while the Autonomous City of Buenos Aires and the provinces (including municipal authorities in each district) act as local enforcement authorities. Sanctions related to consumer protection may include (i) monetary fines; (ii) suspension for five years in the government list of suppliers; (iii) loss of tax privileges, concessions, grants or credits or special regimes; (iv) shut down of the site for 30 days; and (v) punitive damages (these have to be imposed by a court). Current legislation and doctrine consider joint and several liability for all providers in a production/supply chain vis-à-vis consumers.
Regulations Related to Taxation
Brazil
Withholding income tax (“WHT”) on remittances to cover travel expenses of Brazilian individuals abroad
Our Brazilian subsidiary is subject to collection of withholding income tax (“WHT”) on remittances to cover travel expenses of Brazilian individuals abroad, within the parameters established by applicable law. On September 21, 2022, provisional measure number 1,138/2022 came into effect, which reduces, for the five subsequent years, the rates of the WHT levied on these remittances. On February 28, 2023, the provisional measure number 1.138/2022 was converted into Law 14,537. The WHT rate levied on the amounts paid, credited, delivered, employed or remitted to an individual or legal entity residing or domiciled abroad, destined to cover personal expenses, abroad, of individuals residing in Brazil, on tourist, business, service or training trips or on official missions, up to the limit of R$ 20,000.00 (approximately $3,800) per month, was reduced to: (i) 6%, from January 1, 2023 to December 31, 2024; (ii) 7%, from January 1, 2025 to December 31, 2025; (iii) 8%, from January 1, 2026 to December 31, 2026; and (iv) 9%, from January 1, 2027 to December 31, 2027.
Emergency Program to offset the economic effects of the COVID-19 pandemic for the tourism and events sector ("PERSE") in Brazil
On March 18, 2022, the Brazilian legislature removed a prior presidential veto on an article from Law 14,148/2021 that introduced a Temporary Tax Exemption for taxpayers in the tourism and events sector. As a result of the removal, the article has been re-included in Law 14,428/2021 and is effective as from that date.
Law 14,148/2021, published on May 3, 2021, established several emergency actions by the government to offset the economic effects of the COVID-19 pandemic for the tourism and events sector (“Programa Emergencial de Retomada do Setor de Eventos y Turismo” or "PERSE"). Benefits include for a 60-month period a 0% rate for corporate income taxes (Corporate Income Tax “IRPJ” and Social Contribution on Net Income “CSLL”) and 0% rate on federal gross revenue taxes (Contribution to the Social Integration “PIS” and Contribution to Social Security Financing “COFINS).
Ordinance ME number º 7.163/2021, defined the codes of the National Classification of Economic Activities (CNAE) that are considered as an event sector, including the provision of tourist services, pursuant to article 21 of the Law on National Tourism Policy.
Therefore, taxpayers that fulfilled the requirements of the Law and regulations are fully and legally viable to use the benefit. Our Brazilian subsidiary obtained the benefit of the program and has implemented it since March 2022.
During the year ended December 31, 2022, we accounted for an income tax effect of $6.8 million.
Mexico
On April 23, 2021, a decree that amended certain tax and labor laws was issued with the purpose of banning the subcontracting regime (“outsourcing services”). Failure to comply with the new legislation could result in significant penalties, including the potential characterization of tax fraud. The legislative changes to the Income Tax Law, Value Added Tax Law and Federal Fiscal Code became effective as of September 1, 2021.
The following significant modifications to outsourcing services were introduced: (i) the Federal Labor Law generally prohibits outsourcing services; (ii) an exception is created to allow for the rendering of specialized services or the execution of special projects that are not within the corporate purpose stated in the incorporation documents or are not part of the primary economic activity of the service recipient (“specialized services”) so long as the service provided is duly
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registered; (iii) entities that provide specialized services must comply with a new registration procedure with the Ministry of Labor and Social Welfare.
Companies that do not comply with the outsourcing services requirements could be subject to significant penalties, including not deductibility for income tax purposes unless services qualify as specialized services and comply with all relevant formalities. In addition, payments that are not deductible in terms of the Income Tax Law will also not be creditable for purposes of the Value Added Tax Law. On the other hand, payments for simulated specialized services or outsourcing may be considered as tax fraud.
Argentina
Technology District Parque Patricios in Argentina
Since 2013 we have been the beneficiary of a partial tax exemption, applicable until January 31, 2029, under Buenos Aires Municipal Laws No. 2,972 and 6,392, which include, among others, the turnover tax reduction. This benefit implies the reduction, from the turnover tax, of any revenue directly connected to services performed through software applied to e-commerce that are performed within the designated technology district located in Parque Patricios in the city of Buenos Aires, only when: (i) said entity/person is registered under the Economic Districts Registry; and (ii) the entity/person keeps or increases the number of employees hired at the time of registration.
Knowledge-based Economy Promotional Regime in Argentina
On June 10, 2019, the Argentine government enacted Law No. 27,506 (also known as “Knowledge-based Economy Promotional Regime or “Knowledge Law”), which established a regime that provides certain tax benefits for companies that meet specific criteria, such as companies that derive at least 70% of their revenues from specified activities. The Knowledge Law allows companies that were already benefiting from the software development law to apply for tax benefits under the law. The regime was suspended on January 20, 2020, until new rules for its application were issued. On October 7, 2020, changes to the Knowledge Law were finally approved by Congress. The approved regime is effective from January 1, 2020 through December 31, 2029.
In October 2020, the Argentine Congress approved a new Knowledge Based Economy Law. The approved regime is effective as of January 1, 2020 until December 31, 2029. Based on the amended promotional regime, eligible companies that meet specified criteria, are entitled to (i) a reduction of the income tax up to 60% (60% for micro and small enterprises, 40% for medium-sized enterprises and 20% for large enterprises) over the promoted activities for each fiscal year, applicable to both Argentine source income and foreign source income; (ii) stability of the benefits established by the knowledge-based economy promotional regime (as long as the beneficiary is registered and in good standing) and (iii) a non-transferable tax credit bond generally amounting to 70% (up to 80% in certain specific cases) of the company’s contribution to the social security regime of every employee whose job is related to the promoted activities (caps on the number of employees are applicable). The tax credit may be used within 24 months from its issuance date (this period can
be extended for an additional 12 months in certain cases) to offset federal taxes, such as VAT (excludes income tax).
In December 2020, the Argentine government issued Decree No. 1034/2020, which set the rules to implement the provisions of the Knowledge Law. Eligible companies must enroll in a registry according to the terms and conditions established by the Application Authority, which will verify compliance with the requirements. The Decree also set the mechanism for calculating the level of investment in research and development, the level of employee retention, exports, among others. It also establishes that exports of services from companies participating in this regime will not be subject to export on services duties. On January 13, 2021, Argentina’s Ministry of Productive Development, the government entity in charge of implementing the knowledge-based economy promotional regime, issued Resolution No. 4/2021 which was followed by Disposition No. 11/2021 issued by the Under Secretariat of Knowledge Economy on February 12, 2021. Both rules establish further details on the requirements, terms, conditions, application, and compliance procedures to be eligible under the promotional regime.
Disposition No. 11/2021 issued by the Under Secretariat of Knowledge Economy established that for those beneficiaries of the former software promotion regime who have submitted their application for the new Knowledge-based regime in the terms of Resolution No. 449/19 of the former Secretariat of Entrepreneurs (as is the case of Despegar Argentina), the procedure for registration in the new regime consists of submitting a ratification note, attaching the documentation issued by the regulator regarding the normal course of promotional obligations of the law of software promotion.
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The Technical Evaluation Report issued by the Under Secretariat of Knowledge Economy validated compliance of our Argentine subsidiary with the requirements and formalities established in Articles 4 and 17 of Law No. 27,506, as amended, and other applicable regulations in force. Additionally, the report validated compliance with promotional obligations in the ordinary course of business related to the Regime for the Promotion of the Software Industry, created by Law No. 25,922, as amended. The report also validated that our Argentine subsidiary complied with the requirements demanded by the regulations applicable to the regime.
On January 14, 2022, the Under Secretariat of Knowledge Economy issued the Disposition 33/2022 by which our Argentine subsidiary Despegar.com.ar S.A. obtained the registration in the National Registry of Beneficiaries of the Knowledge-Based Economy Promotional Regime, created by Article 3 of Law No. 27,506, as amended. Tax benefits granted pursuant to the promotional regime to Despegar.com.ar S.A. were retroactive to January 1, 2020 and therefore during the years ended December 31, 2022, 2021 and 2020, we accounted for an income tax expense of $0.8 million, an income tax benefit of $0.3 million and $2.1 million, respectively.
Corporate Income Tax Reform
In June 2021, the Argentine Congress enacted Law 27,630, which increased the corporate income tax rate for tax years beginning January 1, 2021 and onwards. The law replaced the 30% fixed tax rate with a progressive tax scale that applied as follows: a) for accumulated net taxable income up to $5 million Argentine Pesos, a 25% tax rate on accumulated net taxable income; b) for accumulated net taxable income from $5 million Argentine Pesos to $50 million Argentine Pesos, a tax payment of $1.25 million Argentine Pesos plus a 30% tax rate on accumulated net taxable income exceeding $5 million Argentine Pesos; c) for accumulated net taxable income exceeding $50 million Argentine Pesos, a tax payment of $14.75 million Argentine Pesos plus a 35% tax rate on accumulated net taxable income exceeding $50 million Argentine Pesos. The mentioned thresholds are subject to inflation adjustment from 2022 onwards. In addition, the new law permanently extended the 7% withholding tax currently in force to dividend distributions.
Duties on Export of Services
In September 2018, the Argentine government issued the Decree 793/2018 which established a temporary duty on exports of services of 12% with a maximum limit of AR$4 per each dollar of export invoice amount. This duty was applicable for exports of years 2019 and 2020. In December 2019, Decree No. 99/2019 reduced the percentage from 12% to 5% without limit of Argentine pesos per dollar, to become effective from January 1, 2020 until December 31, 2021.
In December 2020 the Argentine government issued Decree 1034/2020, which regulates the Knowledge-Based Economy Law, and provides that duties on export services will be taxed at a 0% tax rate when such services are exported by entities registered under the National Registry of Beneficiaries of the Knowledge-Based Economy Promotional Regime. Additionally, Resolution 4/2021, published on January 14, 2021, which was followed by Disposition N° 11/2021 issued by the Under Secretariat of Knowledge Economy on February 12, 2021, provides that this benefit, for those entities that were registered under the Software Promotion Law, will be granted as from January 1, 2020 and the 0% duty rate will be applicable for services exported from the date in which Decree 1034/2020 entered into force (December 22, 2020).
Our Argentine subsidiary obtained the registration in the National Registry of Beneficiaries of the Knowledge-Based Economy Promotional Regime on January 14, 2022 and therefore is not subject to export of services duties since December 22, 2020.
Reverse Withholding Tax for an Inclusive and Solidarity Argentina (PAIS) and General Resolution No. 4815/2020.
Effective as of December 23, 2019, a new reverse withholding tax (Tax for an Inclusive and Solidarity Argentina (PAIS)) was created in Argentina. The 30% tax applies on the purchases by Argentinean residents of foreign services through credit and debit cards; services to be provided outside Argentina, contracted through Argentine travel and tourism agencies –wholesale or retailers–; and the acquisition of international passenger transport services (by land, air, aquatic and road). Furthermore, the Argentine Federal Tax Authorities (AFIP) issued on September 16, 2020 General Resolution No. 4815/2020, which imposed an additional 35% reverse withholding tax applicable on same transactions by Argentine residents. That General Resolution had two main reforms during 2022. The first one was enacted on July 7, 2022 by the General Resolution No 5232/2022 and through this reform, the 35% rate was increased up to a 45%. The second reform was enacted on October 12, 2022 by the General Resolution No 5272/2022, which established another additional 25% reverse withholding tax applicable on the same transactions by Argentine residents.
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Uruguay
We operate as a free trade zone user of the Zonamerica Free Trade Zone in Montevideo, Uruguay (the “Free Trade Zone”), under Law No. 15,921 and its corresponding regulations. No domestic Uruguayan tax whatsoever applies in the Free Trade Zone, except for social security contributions for any Uruguayan employees. No social security contributions are required for non-Uruguayan employees, so long as they do not exceed 25% of the personnel working in the facility located in the Free Trade Zone. In addition, the inflow of goods and services to the Free Trade Zone, as well as their outflow abroad, are tax exempt. The movement of goods and services into a Free Trade Zone from a non-Free Trade Zone Uruguayan territory is treated as an export and therefore also exempt from VAT and the Specific Internal Tax (Impuesto Específico Interno or “IEI”). On the other hand, if goods are introduced into a non-Free Trade Zone Uruguayan territory from a Free Trade Zone, the corresponding import tax will apply. Exporting services from a Free Trade Zone to a non-Free Trade Zone Uruguayan territory is generally prohibited with certain exception for operations with related parties. By law, the Uruguayan state is liable for damages if the tax exemptions, benefits and rights of users of Free Zones granted pursuant to the law are not fulfilled during the term of their contracts.
Regulations Related to Foreign Currency and Exchange Rates
There are also laws and regulations that address foreign currency and exchange rates in many of the countries in which we operate. In certain countries where we operate, we need governmental authorization to pay invoices to a foreign supplier or send money abroad due to foreign exchange restrictions. See “Item 3. Key Information — D. Risk Factors—Risks Related to Latin America—We are subject to significant foreign currency exchange controls in certain countries in which we operate.” and "Item 10. Additional Information — D. Exchange Controls."
Legal Proceedings
We are party to various lawsuits, claims and disputes mainly with customers arising out of the ordinary course of business. We estimate the range of our liability related to pending litigation when we believe the amount or range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the lawsuits or claims. As additional information becomes available, we assess the potential liability related to our pending litigation and claims and revise our estimates. Due to uncertainties related to the resolution of lawsuits and claims, the ultimate outcome may differ significantly from our estimates. In the opinion of management and based on liability accruals provided, our ultimate exposure with respect to these pending lawsuits and claims is not expected to have a material adverse effect on our consolidated financial position or cash flows, although they could have a material adverse effect on our results of operation for a particular reporting period.
As of December 31, 2022 and 2021, we have reserved an amount of approximately $8.8 million and $13.4 million to cover for probable losses, respectively.
We are not currently of any party to any legal, arbitration or administrative proceedings that, in the opinion of our management, is likely to have a material and adverse effect on our business, financial condition and results of operation, other than as set forth below.
Brazil
Between May and July 2016, Booking.com filed several complaints against us alleging that (i) we offered higher prices to Brazilian consumers than those offered to foreign consumers for the same accommodation during the same period of time (“geopricing”) and (ii) we made accommodations unavailable for Brazilian consumers whereas foreign consumers were allowed to book the same accommodations (“geoblocking”). Based on these allegations, Booking.com requested that the public prosecution offices order us to pay penalties and/or prohibit the alleged practices. As a consequence of the complaints, we have pending lawsuits from Booking.com disputing the allegations made by Booking.
In January 2018, the Public Prosecutor’s Office of the State of Rio de Janeiro filed a public civil action against us in the Rio de Janeiro court. This complaint also refers to the alleged geopricing and geoblocking practices in detriment to Brazilian consumers and seeks the cessation of the practice and payment of damages. We filed our defense on March 20, 2018 and provided evidence that we weren’t engaging in those alleged practices. However, the Rio de Janeiro Public Attorney Office requested to the court the suspension of the injunction granted to Decolar, not to seal (classify) Decolar’s defense, and make public available Decolar’s defense documentation. Decolar appealed and the court kept its defense sealed and private; however the court decided to start the phase of “expert examination”, which has not started yet.
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In June 2018 the Consumer Defense Office of the Department of Justice issued a decision against Decolar and condemned it to pay a fine in the amount of R$7.5 million, on the grounds of alleged geopricing and geoblocking practices and obligated Decolar to cease such practices. Although we received an unfavorable decision at the administrative level, we have filed a claim seeking to declare the fine null and void. We currently are in the discovery stage in that proceeding.
In addition, in January, 2022, the Consumer Defense Office issued another fine against Decolar in the amount of R$1.2 million. Decolar disputed the fine in the administrative level and received an unfavorable decision. Decolar then filed a claim against that Office in order to declare the fine null and void. We are currently waiting for the decision of the Court.
Although we believe our Brazilian subsidiary has meritorious defenses to these proceedings, we cannot assure what the ultimate outcome of this matter will be. The final resolution of these claims, which could take several years, is not likely to have a material effect on our financial position or results of operation
Mexico
As in Brazil, Booking.com filed a claim in Mexico accusing our Mexican subsidiary of carrying out certain illegal practices (geopricing and geoblocking) by favoring foreign consumers versus local consumers. The claim was filed before the Office of the Federal Prosecutor for the Consumer in 2019 and we were notified in February 2021. In September 2021, the Office of the Federal Prosecutor for the Consumer rejected Booking’s allegations. Booking may appeal the decision. Although we cannot guarantee the outcome on such proceedings, which could take several years, we do not expect this decision to have a material adverse effect on our financial position or results of operations.
Argentina
As in Brazil and Mexico, Booking.com filed two claims in Argentina accusing our Argentine subsidiary of carrying out certain illegal practices (geopricing and geoblocking) by favoring foreign consumers versus local consumers. The claims were filed before the National Consumer Protection Office (August 2019), and the National Unfair Competition Office (November 2019). In the first claim, Despegar filed its response rejecting plaintiff’s allegation and introducing a counterclaim, asserting that it was Booking.com and not Despegar who carried out misleading practices against consumers. We also accused Booking of lacking the compulsory license granted by the Tourism Ministry to sell tourism products in Argentina. On December 23, 2019 the National Consumer Protection Office rejected the claim filed by Booking and ordered an investigation against it, to be carried out before the National Ministry of Tourism. In the second claim (filed before the National Unfair Competition Office in November 2019) we filed our response rejecting plaintiff’s allegation on the same basis used on the case before the Consumer Protection Office. In February 2021, the Unfair Competition Office also rejected the claim against Despegar. We are currently waiting for the claims to be officially finalized.
Colombia
As in Brazil, Argentina and Mexico, in 2018 Booking.com filed a claim in Colombia accusing our Colombian subsidiary of carrying out certain illegal practices (geopricing and geoblocking) by favoring foreign consumers versus local consumers. The administrative claim before the Consumer Defense Office (“SIC”) has been pending since 2018. Pursuant to applicable law, the SIC had until April 1, 2022 to be able to impose a fine or sanction on this matter. As of the date of this Annual Report the SIC has not issued a decision and, therefore, we will not take any action relating to this matter.
Chile
The Chilean National Consumer Office (SERNAC) filed a class action against Despegar and Viajes Falabella on behalf of all consumers who bought tourist services during the period between December 25, 2019 and December 10, 2021. The allegations include that customers were limited to cancel or reschedule their trips or had to pay fines in connection therewith; there was a delay in the reimbursement of amounts due to customers and that Despegar and Viajes Falabella have abusive clauses in their contracts. SERNAC is looking for the immediate suspension of the alleged conduct, and to declare null all contracts entered into within that period, the fines imposed and the compensation to be paid to all customers. The lawsuit is in the discovery phase. Currently we cannot quantify the exposure for the Company.
Human Capital Management
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People, Company Culture and Total Rewards
At Despegar, our mission is to create great experiences so that travel can enhance people's lives. As of December 31, 2022, we have a team of 4,543 employees across nine countries focused on using our extensive data and technology to create amazing travel experiences.
We aim to go above and beyond to take care of our people - giving them opportunities to grow and develop, and provide benefits that allow them to fuel their passion for travel and resources to help them take care of their well-being. While the competition for talent is fierce, particularly in Argentina, where our headquarters are located, we believe we offer something different: an opportunity to strengthen connections, broaden horizons and bridge divides through travel. We know the power of travel and understand the amazing things we can achieve by making it more accessible to everyone. In order for us to do that, we focus on attracting and retaining the best and brightest people. To that end, we offer competitive compensation and differentiated benefits, including healthcare and retirement programs, wellness and travel reimbursement, an employee assistance program, an employee stock purchase program, time-off programs, volunteer days off, a transportation program, onsite medical care and travel discounts, among others.
Inclusion and Diversity
To best serve our employees, customers, partners and community, we aim to build inclusive and diverse workplaces that prioritize and value a sense of belonging, respect, voice and equal opportunity, with initiatives such as:
•employee-led inclusion business groups, which are employee resource groups focused on promoting awareness related to race, ethnicity, sexual orientation, military status, disability and gender, as well as ally ship for underrepresented identities;
•learning programs addressing bias and exclusive practices within traditional recruitment, hiring and marketing processes;
•an employee onboarding program that includes a robust focus on intercultural awareness, ally skills and our inclusion business groups;
•the utilization of employee surveys and external benchmarking to understand and address identity-based trends in order to set clear goals, create strategies and measure progress for increased headcount, hiring, compensation, advancement and retention of underrepresented employee groups; and
•programs with our travel partners to focus on underserved travelers and drive industry engagement related to inclusion and diversity, and participation in outreach related to these efforts in local and global communities.
Environmental Matters
We are dedicated to the sustainable management of our environmental footprint and engaging our users and ecosystem partners to create synergy. As a responsible corporate citizen, we recognize our role in combating the global challenge of climate change. To strategically manage the environmental impacts arising from our operations, we are committed to promoting sustainable tourism and introducing carbon mitigation measures and will continue to explore ways to further improve energy efficiency. We are always looking for opportunities decrease our carbon footprint and our carbon reduction measures currently are focused mainly on reducing energy consumption and improving energy efficiency at our headquarters.
User Privacy and Data Security
Data security is crucial to our business operations. We have internal rules and policies to govern how we may use and share personal information, as well as protocols, technologies and systems in place to ensure that such information will not be accessed or disclosed improperly. Users must acknowledge the terms and conditions of the user agreement before accessing our products and services, under which they consent to our collection, use, and disclosure of their data in compliance with applicable laws and regulations, and we will only use the data of our users under the conditions agreed by our users.
From an internal policy perspective, we limit access to our servers that store our user and internal data on a “need-to-know” basis. Our internal control protocols cover the full lifecycle of data processing including data collection, data quality management, data encryption and transportation, data storage security, data backup and recovery, data processing and analytics, proper use of data, and data destruction and disposition. We adopt a data encryption system intended to ensure
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the secured storage and transmission of data, and prevent any unauthorized member of the public or third parties from accessing or using our data in any unauthorized manner. We also deploy a variety of detection mechanisms, including machine learning technology and other automated tools that help us independently identify certain misleading information on our platform to remove, suppress, or forward the content for human review. As we continue to develop these tools, content is reviewed by our trained specialists to comply with applicable laws and regulations. Furthermore, we implement comprehensive data masking of user data for the purpose of fending off potential hacking or security attacks.
C.Organizational Structure
Despegar.com, Corp. is a holding company organized in the British Virgin Islands, which owns, directly or indirectly, all of our operating subsidiaries. The diagram below depicts the organizational structure of our key subsidiaries:
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D.Property, Plants and Equipment
The following table shows the location of our significant leased offices and customer service centers, and the term of the leases under which they operate.
| City, Country | Facility | Address | Approximate Square Meters | Agreement Expiration Date | ||||||||||||||||||||||
| Buenos Aires, Argentina | Argentina operation and regional functions (to be returned at expiration of the term. We are in the process of moving our headquarters to our owned facility located at Avenida Jujuy 2013, Buenos Aires) | Juana Manso 1069, 5 Floor | 2,406 | 05/21/2023 | ||||||||||||||||||||||
| La Plata, Buenos Aires Argentina | Argentina operation | Camino Centenario esq. 511, La Plata | 1,400 | 02/28/2023 | ||||||||||||||||||||||
| Santiago, Chile | Chile operation | Cerro El Plomo 6000, office 401, Las Condes | 440 | 09/25/2027 | ||||||||||||||||||||||
| Bogotá, Colombia | Colombia operation and customer service center | Calle 26 No 92-32 BTS 3, 2nd Floor | 1,467 | 01/31/2023 | ||||||||||||||||||||||
| Montevideo, Uruguay | International Hotels, Packages and Other Travel Products operations and Shared service center | Ruta 8 Km. 17,500, local 318, edificio 300, Zonamerica | 2,092 | 03/31/2026 | ||||||||||||||||||||||
| Sao Paulo, Barueri, Brazil | Brazil operation | Alameda Grajaú 219 | 2,862 | 05/14/2028 | ||||||||||||||||||||||
| Sao Paulo, Brazil | Brazil operation (Koin) | Av. Paulista 2421, 13th floor, Bela Vista | 538 | 12/31/2023 | ||||||||||||||||||||||
| Rio de Janeiro, Brazil | Brazil operation (Stays) | Rua Siqueira Campos, 43, cobertura 01 | 750 | 08/01/2027 | ||||||||||||||||||||||
| Ciudad de Mexico, Mexico | Mexico operation | Av de los Insurgentes Sur 1457, Insurgentes Mixcoac | 255 | 09/30/2025 | ||||||||||||||||||||||
| Ciudad de Cancún, Mexico | Quintana Roo | Av. Bonanpak Sm 10 Mz 2 Lote 7 | 3,856 | 10/31/2024 | ||||||||||||||||||||||
| Playa del Carmen, Mexico | Mexico operation | Lote 11, Manzana 318, Zona 1, Playa del Carmen , Quintana Roo | 383 | 03/31/2024 | ||||||||||||||||||||||
| Lima, Peru | Peru operation | Av. Ricardo Rivera Navarrete 495, San Isidro | 643 | 04/30/2026 | ||||||||||||||||||||||
We also own an approximately 2,077 square meter facility at Avenida Jujuy 2013 in the Parque Patricios technology district of Buenos Aires, Argentina, which houses part of our Argentina operations including IT support and will shortly also house our operations and regional functions. We also own a 303 square meter facility at Sanchez de Loria 2395, 4 Floor, also in the Parque Patricios technology district of Buenos Aires, which we intend to sell.
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As part of our Mexican operations, Best Day leases approximately 116 small kiosks, mainly in hotels and shopping centers, which house part of our sales operations and approximately 92 vans for providing transportation to customers who contract destination services.
Our properties are geographically distributed to meet our regional operating requirements, and none of our properties are individually material to our business operations. Many of our leases have an option to renew, and we believe that we will be able to successfully renew expiring leases on terms satisfactory to us if needed. We believe that our facilities are adequate for our operations and that suitable additional space will be available when needed. We continue to review the location of our offices and from time to time may change locations to a place where we better address the needs of our employees, customers and business. In 2022 we closed a few locations and we may decide to close or move additional locations in 2023.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.Operating Results
Overview
We are the leading online travel company in Latin America, mainly known by our two brands, Despegar, our global brand, and Decolar, our Brazilian brand. In Mexico we are also known by our brands Best Day, BD Experience and HotelDo, which we acquired in October 2020. In Chile, we are also known by the brand Viajes Falabella, an offline travel agency with online presence, acquired in June 2019, for which we currently have a license. Koin is our online payment and consumer lending services platform in Brazil, which we acquired in August 2020. During 2022, as part of our regional consolidation strategy, we acquired Viajanet and a 51% ownership stake in Stays, further enhancing our B2C and B2B offerings.
We have a comprehensive product offering, including airline tickets, packages, hotels and other travel-related products, which enables consumers to find, compare, plan and purchase travel products easily through our marketplace. We provide our network of travel suppliers a technology platform for managing the distribution of their travel products and access to our travel customers.
Segment Information
We determine our operating segments based on how our chief operating decision makers (“CODM”) manage our business, make operating decisions and evaluate operating performance. Effective for our fiscal year 2022, our CODM changed their internal reporting to refine the way they view our financial services business and its interaction with our travel business. Additionally, we started allocating certain expenses to our segments which were previously considered part of our corporate structure and were unallocated. These changes resulted in revisions to the financial information provided to the CODM on a recurring basis in their evaluation of our financial performance and the decision-making process.
Accordingly, we changed our segment reporting under ASC 280 “Segment Reporting” to report three reportable segments: “Air”, “Packages, Hotels and Other Travel Products” and “Financial Services”. We recast previously reported segment financial information for the years ended December 31, 2021 and 2020 to reflect our new reportable segments.
Our new segment reporting is as follows:
Travel Business:
Our travel business is comprised of two reportable segments: “Air” and “Packages, Hotels and Other Travel Products”.
•Our “Air” segment primarily consists of the sale of airline tickets and excludes airline tickets that are packaged with other non-airline flight products.
•Our “Packages, Hotels and Other Travel Products” segment primarily consists of the sale of travel packages (which can include airline tickets), as well as stand-alone sales of hotel rooms, vacation rentals, car rentals, travel insurance and destination services.
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Both of these segments also include the sale of advertisements and incentives earned from travel suppliers.
Financial Services Business:
Our financial services business is comprised of one reportable segment:
•Our “Financial Services” segment primarily consists of loan origination to our travel business’ customers and to customers of other merchants in various industries. Our “Financial” segment also consists of payments processing, fraud identification, credit scoring and IT services to our travel business and to third-party merchants.
For the years ended December 31, 2022 and 2021, all of our loans receivable were originated to consumers in Brazil. As of
December 31, 2022, and 2021, 61% and 84% of loans receivable, respectively, were originated to consumers seeking to buy travel products and services in our Brazilian travel subsidiary, Decolar, and the remaining comprised loan receivable originated to consumers seeking to buy products with other merchants. See Note 10 to our consolidated financial statements for additional information.
Generally, our segment disclosure does not include intersegment revenues related to intra-group invoicing for the use of trademarks and various management services which are eliminated from the operating results of each segment. Intersegment transactions are conducted according to our transfer pricing policy. However, our segment disclosure does include intersegment revenue consisting mainly of credit card processing services provided by Koin to our travel business’ subsidiaries. These intersegment transactions are recorded by each segment at amounts that approximate fair value as if the transactions were between third parties, and therefore, impact segment performance. However, the revenue and corresponding expense are eliminated in consolidation. The elimination of such intersegment transactions is included within the "Intersegment eliminations" column.
In 2022, 40.1%, 59.1% and 0.8% of our total consolidated revenue was derived from our Air, our Packages, Hotels and Other Travel Products and our Financial Services segments, respectively. In 2021, 36.7%, 63.1% and 0.2% of our total consolidated revenue was derived from our Air, our Packages, Hotels and Other Travel Products and our Financial Services segments, respectively. In 2020, 47.8%, 52.1% and 0.1% of our total consolidated revenue was derived from our Air, our Packages, Hotels and Other Travel Products and our Financial Services segments, respectively.
For the years ended December 31, 2022, 2021 and 2020, we generated:
•consolidated net revenue of $538.0 million, $322.8 million, and $131.3 million;
•consolidated operating loss of $1.8 million, $95.9 million and $177.2 million;
•consolidated net loss attributable to Despegar.com, Corp. of $68.5 million, $104.6 million and $142.6 million, respectively;
•consolidated Adjusted Segment positive/(negative) EBITDA attributable to our Air segment of $18.0 million, $(21.5) million and $(33.0) million;
•consolidated Adjusted Segment positive/(negative) EBITDA attributable to our Packages, Hotels and Other Travel Products segment of $42.3 million, $(4.8) million and $(84.7) million;
•consolidated Adjusted Segment (negative) EBITDA attributable to our Financial Services segment of $(18.3) million, $(13.8) million and $(4.1) million; and
•total consolidated positive/(negative) Adjusted EBITDA of $41.9 million, $(40.1) million and $(121.8) million.
Trends
Impact of COVID-19
The COVID-19 pandemic significantly affected the level of economic activity around the world and had an unprecedented effect on the global travel industry. Since the first quarter of 2020, the governments of many countries implemented a variety of containment measures, including travel restrictions, bans and advisories, instructions to practice social distancing, curfews, quarantine advisories, including quarantine restrictions after travel in certain locations, shelter-in-place orders, required closures of non-essential businesses, vaccination mandates or requirements for businesses to confirm employees’ vaccination status, and other restrictions. The COVID-19 pandemic also had broader economic impacts, including an increase in unemployment levels and reduction in economic activity, which led to a recession in 2020 and
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further reduction in consumer or business spending on travel activities. These impacts had a significant adverse effect on travel suppliers and travelers on whom our business relies.
With the availability of vaccines increasing familiarity with the virus, as well as the evolution of milder COVID-19 variants, most COVID-19 related travel restrictions have been lifted, and countries around the world have reopened their borders for foreign travel. During 2021 economies recovered and led to more travel activity, particularly at the end of the year. In 2022, travel activity has increased significantly, however, travel activity has not yet reached pre-pandemic levels.
In 2020, given the severe downturn in the global travel industry which results in unprecedented levels of cancellations and customer refunds and lower new bookings, we experienced a 75% decrease in revenue as compared to 2019. In 2021, our revenues showed signs of recovery and increased 146% as compared to 2020. In 2022, our revenues increased 67% as compared to 2021, although they did not reach pre-pandemic levels. We also experienced unfavorable working capital trends and negative cash flows from operations in 2020 and 2021, although the level of negative cash flow moderated as booking trends improved and cancellations stabilized. In 2022, with the increase in travel activity we achieved positive cash flows from operations.
Following the onset of the COVID-19 pandemic, we accelerated the execution of several cost saving and cash preservation initiatives. As such, we implemented several actions aimed at reducing our costs and our monthly cash usage. These actions included (i) temporarily reducing salaries of our senior and middle management; (ii) suspending bonuses to all employees; (iii) reducing part of our workforce and implementing a hiring freeze and limiting inflation salary increases; (iv) reducing working hours and implementing unpaid leave in certain locations; (v) accelerating synergies from acquisitions; (vi) renegotiating supplier payment terms and conditions; (vii) reviewing and renegotiating, to the extent possible, all contracts and commitments; (viii) reducing marketing expenses and (ix) deferring non-critical capital expenditures.
In September 2020, we issued convertible and non-convertible preferred stock and warrants to strengthen our liquidity position, in an aggregate gross proceeds of $200 million. The losses incurred in 2022, 2021 and 2020 due to the effects of the COVID-19 pandemic increased our accumulated deficit to $643.3 million, which in turn led to a shareholders’ deficit of $127.2 million as of December 31, 2022. We have taken and continue to take actions to improve our liquidity, including managing our cost structure and spending where possible to mitigate any anticipated loss of revenue.
Even though there have been improvements in the economic and operating conditions for our business in 2021 and 2022 since the outset of the COVID-19 pandemic, we cannot predict the long-term effects of the pandemic on our business or the travel industry as a whole. A resurgence in the spread of new variants of COVID-19, or the emergence of new pandemics, or the widespread concern of contagious diseases, could impact economic activity and travel and, consequently, could adversely affect our business.
Long-term trends
We believe that our results of operations and financial performance will be driven primarily by the following long-term trends:
•Growth in and Retention of our Traveler Customer Base: A key driver of our revenue will be the number of customer transactions and the growth in our customer base. One important driver of growth in our travel customer base is consumer awareness of our brand which we foster via our online and offline marketing throughout our target markets in Latin America. We also benefit from network effects, in that a larger customer base helps us to attract additional travel suppliers and, in turn, a larger network of travel suppliers helps us to attract new travel customers as well as drive retention and repeat purchases. We focus on maintaining strong customer satisfaction to build long-term customer relationships. During the 2022, 2021 and 2020, approximately 57%, 53% and 58%, respectively, of our travel customers had completed previous purchases on our platform.
•Cross-Selling: Our financial results are also driven by our ability to cross-sell and increase the number of products that we are able to sell in connection with each trip, which allows us to increase our revenue from each transaction without incurring the costs of acquiring additional travel customers.
•Changes in Product Mix and New Product Offerings: In addition to the total volume of transactions, our operating results also vary depending on product mix. In particular, packages and hotels tend to have higher margins than air travel. In addition, we continually seek to expand our product offerings, whether by adding
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new product categories, such as our introduction of our local concierge and vacation rentals products, which may have higher or lower margins than our overall business, or by the expansion of our travel supplier base.
•Shift to Mobile Transactions: As smart phone penetration in Latin America continues to increase, Latin American consumers have begun to make greater use of mobile devices to transact online. Mobile is an increasingly important part of our business, as consumers are quickly able to access and browse our real-time travel offerings, compare prices and make purchases through their mobile devices. During 2022, 2021 and 2020, mobile accounted for approximately 73%, 72% and 71%, respectively, of all of our user visits, and approximately 50% of our transactions were completed on our mobile platform for 2022 and 2021, and 48% for 2020, complementing our desktop website traffic. Our strategic focus on mobile enables us to remain connected to travel customers and provides the opportunity for travel customers to access our platform after they have arrived at their destination to purchase additional products, such as rental cars, destination services and travel insurance, or make last-minute hotel or air travel bookings.
•Selling and Marketing Expenditures: Our number of transactions and gross bookings, and consequently our revenue and results of operations, are impacted by the level of our selling and marketing expenditures. We monitor our selling and marketing expenditures and their impact on our revenue in many cases virtually in real-time, as a significant amount of our selling and marketing expenditures relate to online advertising for which we can obtain real-time click-through data. As a result, we are able to adjust our selling and marketing expenditures to respond rapidly to changing market conditions. During 2021, our selling and marketing expenditures increased $38.0 million, or 66.3% as compared to 2020, when as part of our cost-savings measures in connection with the COVID-19 pandemic, we reduced our selling and marketing expenses significantly. During 2022, our selling and marketing expenditures increased $69.9 million, or 73.3%, as compared to 2021.
Recent Acquisitions
The comparison of our results of operations for 2022, 2021 and 2020 are affected by the timing and size of our consolidated acquisitions.
On January 31, 2022, we finalized the purchase of the remainder 16% of Koin and on June 1, 2022, we acquired Viajanet which we consolidated for seven months in our fiscal year 2022. On July 1, 2022, we completed the acquisition of a 51% ownership stake in Stays, which we accounted for as an equity investment.
We did not complete any acquisitions during our fiscal year 2021.
In October 2020, we acquired Best Day Group which we consolidated for three months in our fiscal year 2020, and in August 2020, we acquired an 84% ownership stake in Koin, which we consolidated for four months in our fiscal year 2020.
Seasonality
We generally experience seasonal fluctuations in the demand for our travel services. Our most significant markets in the Southern hemisphere are Brazil and Argentina, where summer runs from December 1 to February 28 and winter runs from June 1 to August 31. Our most significant market in the Northern hemisphere is Mexico, where summer runs from June 1 to August 31 and winter runs from December 1 to February 28. Accordingly, traditional leisure travel bookings in the Southern hemisphere are generally the highest in the third and fourth quarters of the year as travelers plan and book their winter and summer holiday travel. The number of bookings typically decreases in the first quarter of the year. In the Northern hemisphere, bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel.
The continued growth of our international operations or a change in product mix may influence the typical trend of the seasonality in the future, and there may also be business or market-driven dynamics that result in short-term impacts to revenue or profitability that differ from the typical seasonal trends.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in this Annual Report may not be the same as those for any subsequent quarter or full year.
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The COVID-19 pandemic disrupted our typical seasonal pattern for bookings, revenue, profit, and cash flows during 2020 and 2021. Significantly higher cancellations and reduced booking volumes, particularly in the first half of 2020, resulted in material operating losses and negative cash flow. Booking and travel trends improved in the second half of 2020 and throughout 2021 and 2022, and in 2022 have generally returned to historic seasonality.
Reclassifications
We revised the presentation of credit loss expense on our consolidated statements of operations. Previously, we classified credit loss expense within general and administrative expenses. In line with the increasing significance of our financial services business and the impact of its credit loss expense to our consolidated operations, we determined that the credit loss expense would be more appropriately reflected in the financial statement line item cost of revenue. We reclassified our entire credit loss expense in our previous financial statements to be comparable with our current presentation.
The following table presents a summary of the amounts as reported and as reclassified in our consolidated statements of operations for the years ended December 31, 2021 and 2020:
| For the year ended December 31, 2021 | For the year ended December 31, 2020 | |||||||||||||||||||||||||
| As reported | As reclassified | As reported | As reclassified | |||||||||||||||||||||||
| Cost of revenue | (157,003) | (160,240) | (85,518) | (103,825) | ||||||||||||||||||||||
| General and administrative | (86,931) | (83,694) | (94,722) | (76,415) | ||||||||||||||||||||||
In addition, certain other comparative figures of our consolidated financial statements were modified to provide more detailed disclosures. This change has not impacted the total amount of assets, liabilities, net loss and total equity.
Revision of Previously Filed Consolidated Financial Statements
Subsequent to the issuance of our consolidated financial statements included in our Annual Report on Form 20-F for the fiscal year ended December 31, 2021, which was filed with the SEC on April 29, 2022, we identified errors in certain prior period amounts. Accordingly, we have corrected these errors in our consolidated financial statements and related notes as of and for the year ended December 31, 2022.
Error in the Presentation of the Statement of Cash Flows for the Year ended December 31, 2021:
We identified certain loans that had been reported as cash flows used in operating activities in the statement of cash flows for the year ended December 31, 2021, that should have been presented as cash flows used in investing activities. We therefore corrected the previously presented cash flows for these loans, and in doing so, the consolidated statement of cash flows for 2021 was adjusted to decrease net cash flows used in operating activities by $1.7 million with a corresponding increase in net cash flows used in investing activities.
Error in the “Valuation and qualifying accounts” Note for the Years ended December 31, 2021 and 2020:
We identified an error in the “Valuation and qualifying accounts” note included in our consolidated financial statements for the year ended December 31, 2021. The error related to the line “provision for cancellations” in the note. In the preparation of the note, certain actual deductions for cancellations were inadvertently netted out of the “Charges to earnings” column instead of being included as actual uses of the provision in the “Deductions” column. The error related only to a misallocation of charges and uses between columns on the note and did not change the beginning and ending balances of the provision for cancellations. Moreover, there is no change in the difference between the charge to earnings and the deductions. The error did not impact our consolidated financial statements or any other note for any period.
Error in the Calculation of Earnings per Share for the Years ended December 31, 2021 and 2020:
We identified an error in the calculation of the weighted common shares outstanding and consequently in the loss per common share for the years ended December 31, 2021 and 2020 included in our consolidated financial statements for the year ended December 31, 2021. In the calculation process, we did not exclude the number of common shares bought back during 2018 and 2019 and held in treasury to determine the number of outstanding common shares at the beginning of the periods, resulting in incorrect reported amounts related to basic and diluted loss per common share for the years ended December 31, 2021 and 2020.
The quantitative impact of the error on weighted average common shares outstanding and loss per share for 2021 and 2020 as follows:
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| 2021 | 2020 | ||||||||||
| Net loss for the year (*) | (105,865) | (142,869) | |||||||||
| Less: Net loss attributable to redeemable non-controlling interest (*) | 1,237 | 282 | |||||||||
| Net loss for the year attributable to Despegar.com, Corp. (*) | $ | (104,628) | $ | (142,587) | |||||||
| Accretion of redeemable non-controlling interest (*) | (1,355) | (78) | |||||||||
| Accretion of Series A non-convertible preferred shares (*) | (10,600) | (2,831) | |||||||||
| Accrual of cumulative dividends of Series A non-convertible preferred shares (*) | (15,251) | (4,212) | |||||||||
| Accrual of dividends of Series B convertible preferred shares (*) | (2,000) | (553) | |||||||||
| Net loss for the year attributable to Despegar.com, Corp. common shareholders (*) | $ | (133,834) | $ | (150,261) | |||||||
| Numerator of basic and diluted losses per share (*) | $ | (133,834) | $ | (150,261) | |||||||
| Weighted average common shares outstanding - basic and diluted – as previously reported | 81,625 | 73,001 | |||||||||
| Denominator of basic and diluted losses per share – as previously reported | 81,625 | 73,001 | |||||||||
| Basic and diluted losses per share – as previously reported [A] | $ | (1.64) | $ | (2.06) | |||||||
| Weighted average common shares outstanding - basic and diluted – as revised | 76,653 | 67,994 | |||||||||
| Denominator of basic and diluted losses per share – as revised | 76,653 | 67,994 | |||||||||
| Basic and diluted losses per share – as revised [B] | $ | (1.75) | $ | (2.21) | |||||||
Impact on loss per share
| Understated by [A] – [B] | $ | 0.11 | $ | 0.15 | |||||||
| Impact in % ([B] – [A])/[A] | 7 | % | 7 | % | |||||||
(*) No change from previously reported amounts
We have evaluated the materiality of the above mentioned errors based on an analysis of quantitative and qualitative factors and concluded that they were not material to the prior period financial statements, individually or in aggregate. See Note 2 to our consolidated financial statements for further details.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with generally accepted accounting principles in the United States (“GAAP”). Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:
•it requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and
•changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.
For more information on each of these policies, see Note 3 to our consolidated financial statements. We discuss information about the nature and rationale for our critical accounting estimates below.
Recoverability of Goodwill and Indefinite and Definite-Lived Intangible Assets
Goodwill. We assign goodwill to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. We assess goodwill for impairment annually as of December 31, or more frequently, if events and circumstances indicate impairment may have occurred. In the evaluation of goodwill for impairment, we typically perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value and, if applicable, record an impairment charge based on the excess of the reporting unit’s carrying amount over its fair value. Periodically,
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we may choose to perform a qualitative assessment, prior to performing the quantitative analysis, to determine whether the fair value of the goodwill is more likely than not impaired.
We compared the fair value of the reporting units to their carrying values. The fair value estimates for all reporting units were based on a weighted-probability analysis of the present value of future discounted cash flows, Level 3 inputs (income approach). The income approach estimates fair value utilizing long-term growth rates and discount rates applied to the cash flow projections. The significant estimates used in the discounted cash flows model included our forecasted gross bookings; forecasted revenues, net of significant costs and expenses; and the discount rate. Our assumptions were based on the actual historical performance of the reporting units and considered operating result trends, the anticipated duration of COVID-19 impacts and rates of recovery, and implied risk premiums based on market prices of our equity and debt as of the assessment dates. We believe the discounted cash flows is the best method for determining the fair value of our reporting units because it is one of the most common valuation methodologies used within the travel and internet industries.
Indefinite-Lived Intangible Assets. In our evaluation of our indefinite-lived intangible assets, we typically first perform a quantitative assessment, and an impairment charge is recorded for the excess of the carrying value of indefinite-lived intangible assets over their fair value, if necessary. We base our measurement of fair value of indefinite-lived intangible assets, which primarily consist of brands and domains, using the income approach under the relief-from-royalty method. The significant estimates used in the income approach under the relief from royalty method included our forecasted gross bookings; forecasted revenues, net of significant costs and expenses; and the royalty rates. This method assumes that the brands and domains have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. As with goodwill, periodically, we may choose to perform a qualitative assessment, prior to performing the quantitative analysis, to determine whether the fair value of the indefinite-lived intangible asset is more likely than not impaired.
Definite-Lived Intangible Assets. We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its estimated fair value.
The use of different estimates or assumptions in determining the fair value of our goodwill, indefinite-lived and definite-lived intangible assets may result in different values for these assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairment charge.
Goodwill Impairment Testing
As of December 31, 2022, we had an aggregate amount of goodwill of $138.6 million, of which $29.5 million relates to our Air segment, $103.3 million relates to our Packages, Hotels and Other Travel Products segment and $5.9 million to our Financial Services segment.
We test goodwill for impairment at the reporting unit level and the tests are performed as of December 31 of each year, or more frequently if events and circumstances indicate that an impairment may have occurred. We compared the fair value of the reporting units to their carrying values. The fair value estimates of the reporting units are based on the present value of their future discounted cash flows, Level 3 inputs (income approach). The income approach estimates fair value utilizing long-term growth rates and discount rates applied to the cash flow projections. The significant estimates used in the discounted cash flows model included our forecasted gross bookings; forecasted revenues, net of significant costs and expenses; and the discount rate. Our assumptions were based on the actual historical performance of the reporting units and considered operating result trends, the anticipated duration of COVID-19 impacts and rates of recovery, and implied risk premiums based on market prices of our equity and debt as of the assessment dates.
As of December 31, 2022, we performed our annual goodwill impairment test and concluded that there was no impairment of goodwill.
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Based on our analysis, we concluded that the estimated fair value for each of our reporting units, as of December 31, 2022, was reasonable. In each case, the estimated fair value exceeded the respective carrying value. We concluded that the goodwill assigned to each reporting unit, as of December 31, 2022, was not impaired and that neither reporting unit was at risk of failing the goodwill impairment test as prescribed under U.S. GAAP.
2021 and 2020 Impairment Assessments
During 2021 and 2020, due to the severe and persistent negative effects that COVID-19 had on global economies, the travel industry, and our business, as well as the uncertainty and high variability in anticipated versus actual rates of recovery, in addition to our annual assessments in December 2021 and 2020, we deemed it necessary to perform various interim assessments of goodwill throughout 2021 and 2020. As a result of these assessments, we recognized goodwill impairment charges of $4.2 million and $0.6 million during 2021 and 2020, respectively, for certain of our reporting units.
The estimation of fair value reflects numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding expected growth (gross bookings and net revenues), expected length and severity of the impact from the COVID-19 pandemic, the shape and timing of the subsequent recovery, as well as other key assumptions with respect to matters outside of our control, such as the discount rate. It requires significant judgments and estimates, and actual results could be materially different than the judgments and estimates used to estimate fair value. Future events and changing market conditions may lead us to re-evaluate the assumptions reflected in the current forecasts, which may result in a need to recognize goodwill impairment charges that could have a material adverse effect on our results of operations.
Business Combinations
We assign the value of the consideration transferred to acquire a business to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, in particular with respect to valuation of intangible assets acquired. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and trade names, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
Legal, Labor and Non-Income Tax Contingencies
Periodically, we review the status of all significant outstanding matters to assess the potential financial exposure. When (i) it is probable that an asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss in our consolidated statements of operations. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet both of these conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the consolidated financial statements. Significant judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals made on the best information available at the time which can be highly subjective. The final outcome of these matters could vary significantly from the amounts included in the accompanying consolidated financial statements.
Income Taxes
We account for income taxes under the asset and liability method that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations or effective tax rate.
Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenues and expenses that qualify for preferential tax treatment, and segregation of foreign and domestic earnings and expenses to avoid double taxation. Although we believe that our estimates are reasonable, the final tax outcome of these matters could be different from that which is reflected in our historical income tax provisions
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and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made.
In estimating future tax consequences, all expected future events are considered other than enactments of changes in tax laws or rates. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. We consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, the carryforward periods available for tax reporting purposes and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the measurement period. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time.
As of December 31, 2022, we had a valuation allowance on certain foreign net operating losses and foreign tax credits based on our assessment that it is more likely than not that the deferred tax asset will not be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our “Income tax expense” line in our consolidated statement of income.
The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We account for these uncertain tax issues pursuant to ASC 740, Income taxes, which contains a two- step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return.
The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties.
We treat taxes on global intangible low-taxed income (“GILTI”) introduced by the U.S. Tax Cuts and Jobs Act (the “Tax Act”) as period costs. See Note 21 to our consolidated financial statements for further additional information related to our income taxes.
Recently Issued and Not Yet Adopted Accounting Pronouncements under U.S. GAAP
For information on recently issued accounting pronouncements under U.S. GAAP, see Note 3 to our consolidated financial statements.
Operating and Financial Metrics
Our operating results are affected by certain operating metrics, such as number of transactions and gross bookings, which we believe are necessary for understanding and evaluating our company. We also regularly review the following key financial metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions:
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| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | % of Change | |||||||||||||||
| In thousands | |||||||||||||||||
| Operational Metrics | |||||||||||||||||
| Number of transactions | |||||||||||||||||
| By country | |||||||||||||||||
| Brazil | 2,992 | 2,134 | 40.2 | ||||||||||||||
| Mexico | 1,614 | 1,849 | (12.7) | ||||||||||||||
| Argentina | 1,157 | 729 | 58.7 | ||||||||||||||
| Other | 2,551 | 2,097 | 21.6 | ||||||||||||||
| Total number of transactions | 8,314 | 6,809 | 22.1 | ||||||||||||||
| By segment | |||||||||||||||||
| Air | 4,293 | 3,570 | 20.3 | ||||||||||||||
| Packages, Hotels and Other Travel Products | 3,938 | 3,224 | 22.1 | ||||||||||||||
| Financial Services | 83 | ||||||||||||||||