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OWW > SEC Filings for OWW > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for ORBITZ WORLDWIDE, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report and our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2012.

EXECUTIVE OVERVIEW

General

We are a leading global online travel company ("OTC") that uses innovative technology to enable leisure and business travelers to search for and book a broad range of travel products and services. Our brand portfolio includes Orbitz, CheapTickets, The Away Network and Orbitz for Business in the United States; ebookers in Europe; and HotelClub and RatesToGo (collectively referred to as "HotelClub") based in Australia, which have operations globally. We provide customers with the ability to book a wide array of travel products and services from suppliers worldwide, including air travel, hotels, vacation packages, car rentals, cruises, travel insurance and destination services such as ground transportation, event tickets and tours. Our mission is to unlock the joy of travel by becoming the travel expert for the world, where our customers easily find and book personalized travel options. Industry Trends
The online travel industry is highly competitive, and our position in the industry is affected by the industry-wide trends discussed below, as well as a number of factors specific to our global operations and supplier relationships. In addition, the presence of high unemployment rates and related pressure on consumer spending, as well as perceived uncertainty about the state of the global economy, particularly in Europe, cause uncertainty and volatility in the travel market.
Over the past few years, fundamentals in the global hotel industry have strengthened. However, while we have generally seen growth in average daily rates for hotels, during 2012 we have seen the deceleration of these growth rates on a global basis, driven in part by macroeconomic conditions in Europe. Demand in the air travel industry has also strengthened over the past few years, but this has been driven largely by increased corporate travel, resulting in higher airfares. In addition, while air capacity for major air suppliers was up slightly during the second half of 2011, we are seeing a slight decline in capacity in 2012.
Our suppliers continue to look for ways to decrease their overall distribution costs, which could significantly reduce the net revenue OTCs earn from travel and other ancillary travel products. We have encountered, and expect to continue to encounter, pressure on supplier economics as certain supply agreements are renegotiated. As a result, the net revenue we and other OTCs earn in the form of incentive payments from global distribution systems ("GDSs") or in the form of mark-ups and commissions from our suppliers are likely to be impacted over the long term.
Intense competition in the travel industry has historically led OTCs and travel suppliers to aggressively spend on online marketing. Competition for search engine key words continues to be intense as certain OTCs and travel suppliers increase their marketing spending in this area. In addition, as meta-search engines continue to expand their presence in the online travel market, competition will intensify and could increase the cost to acquire traffic. In addition, last year Google launched Google Flights, which directs consumers to suppliers' websites for potential booking of travel and to OTC sites only on a limited basis; if this search-engine site gains popularity, the cost to acquire traffic could also increase.


Table of Contents

RESULTS OF OPERATIONS
                            Three Months Ended September 30,          Increase/ (Decrease)            Nine Months Ended September 30,          Increase/ (Decrease)
                                2012                 2011                 $              %               2012                 2011                $              %
                                              (in thousands)                                                           (in thousands)
Net revenue              $       198,303       $       202,924     $     (4,621 )       (2 )%     $       589,059       $       589,673     $      (614 )         -  %
Cost and expenses:
Cost of revenue                   38,203                36,095            2,108          6  %             109,704               107,906           1,798           2  %
Selling, general and
administrative                    57,071                67,679          (10,608 )      (16 )%             194,696               204,180          (9,484 )        (5 )%
Marketing                         62,640                61,351            1,289          2  %             197,304               189,867           7,437           4  %
Depreciation and
amortization                      14,062                14,939             (877 )       (6 )%              42,212                45,655          (3,443 )        (8 )%
Impairment of other
assets                             1,417                     -            1,417         **                  1,417                     -           1,417          **
Total operating expenses         173,393               180,064           (6,671 )       (4 )%             545,333               547,608          (2,275 )         -  %
Operating income                  24,910                22,860            2,050          9  %              43,726                42,065           1,661           4  %
Other income/(expense):
Net interest expense              (8,847 )              (9,746 )            899         (9 )%             (28,086 )             (30,052 )         1,966          (7 )%
Other income/(expense)                 3                     9               (6 )      (67 )%                 (41 )                 377            (418 )        **
Total other expense               (8,844 )              (9,737 )            893         (9 )%             (28,127 )             (29,675 )         1,548          (5 )%
Income before income
taxes                             16,066                13,123            2,943         22  %              15,599                12,390           3,209          26  %
Provision for income
taxes                              1,248                 1,890             (642 )      (34 )%               2,708                 3,162            (454 )       (14 )%
Net income               $        14,818       $        11,233     $      3,585         32  %     $        12,891       $         9,228     $     3,663          40  %

** Not meaningful.

Overall Financial Results
In February 2012, we completed a multi-year initiative to bring all of our consumer brands onto a common global technology platform, with the successful migration of the remaining air, car and dynamic packages paths of Orbitz.com. With this migration project behind us, we have increased our focus on technology innovation and growth. The completion of this migration effort has created opportunities for us to enhance efficiency, site performance and the consumer experience in 2012 and beyond.

During the third quarter of 2012, we reported net income of $14.8 million, compared with $11.2 million in the third quarter of 2011. Our overall results were impacted by certain external factors, including economic challenges in Europe, a stronger U.S. dollar and declining domestic air travel in the OTC channel. In addition, we experienced air operational issues for our domestic leisure brands during the quarter that impacted both our air and hotel performance. We have addressed these issues and have since seen an improvement in performance.

Domestically, hotel and vacation package transaction volumes continued to grow in the third quarter. In addition, air volume declined in the quarter due to a combination of lower U.S. OTC channel volume, the operational issues noted above and changes we made with respect to certain revenue management strategies in the third quarter of 2011.

Internationally, in the third quarter of 2012 we continued to see growth in hotel and vacation package transaction volumes at ebookers; however, performance was affected by unfavorable foreign currency fluctuations and the weak macroeconomic conditions in Europe. In addition, HotelClub experienced improving hotel transaction performance in the quarter.


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Net Revenue

The table below shows our gross bookings, net revenue, transaction growth and
hotel room night growth for the three and nine months ended September 30, 2012
and 2011. Gross bookings, transactions and stayed hotel room nights not only
impact our net revenue trends, but these metrics also provide insight into
changes in overall travel demand, both industry-wide and on our websites. Air
gross bookings are comprised of stand-alone air gross bookings, while non-air
gross bookings include gross bookings from hotels, car rentals, vacation
packages, cruises, destination services and travel insurance.
                                                                       Increase/                                                       Increase/
                            Three Months Ended September 30,          (Decrease)             Nine Months Ended September 30,          (Decrease)
                                  2012               2011             $           %               2012               2011             $           %
                                             (in thousands)                                                  (in thousands)
Gross bookings:
Domestic:
Air (a)                    $       1,486,923     $ 1,671,058     $ (184,135 )   (11 )%     $       5,089,100     $ 5,249,942     $ (160,842 )    (3 )%
Non-air (b)                          600,875         579,885     $   20,990       4  %             1,890,674       1,791,666         99,008       6  %
Total domestic gross
bookings                           2,087,798       2,250,943       (163,145 )    (7 )%             6,979,774       7,041,608        (61,834 )    (1 )%
International:
Air (c)                              335,014         355,077        (20,063 )    (6 )%             1,091,024       1,097,987         (6,963 )    (1 )%
Non-air (d)                          227,684         244,130        (16,446 )    (7 )%               692,918         682,912         10,006       1  %
Total international
gross bookings                       562,698         599,207        (36,509 )    (6 )%             1,783,942       1,780,899          3,043       -  %
Total gross bookings       $       2,650,496     $ 2,850,150     $ (199,654 )    (7 )%     $       8,763,716     $ 8,822,507     $  (58,791 )    (1 )%

Net revenue:
Air                        $          61,917     $    63,850     $   (1,933 )    (3 )%     $         201,474     $   205,872     $   (4,398 )    (2 )%
Hotel                                 61,189          59,094          2,095       4  %               166,549         159,479          7,070       4  %
Vacation package                      33,384          32,393            991       3  %               100,026          91,730          8,296       9  %
Advertising and media                 14,347          14,310             37       -  %                41,077          40,624            453       1  %
Other                                 27,466          33,277         (5,811 )   (17 )%                79,933          91,968        (12,035 )   (13 )%
Total net revenue (e)      $         198,303     $   202,924     $   (4,621 )    (2 )%     $         589,059     $   589,673     $     (614 )     -  %

Net revenue:
Domestic                   $         142,297     $   142,214     $       83       -  %     $         424,713     $   418,573     $    6,140       1  %
International                         56,006          60,710         (4,704 )    (8 )%               164,346         171,100         (6,754 )    (4 )%
Total net revenue (e)      $         198,303     $   202,924     $   (4,621 )    (2 )%     $         589,059     $   589,673     $     (614 )     -  %

Transaction and hotel room night growth/(decline):
Booked transactions (7 )% (7 )% (3 )% (8 )% Stayed hotel room nights - % (1 )% 2 % (1 )%

(a) The decrease in domestic air gross bookings for the three and nine months ended September 30, 2012 was driven primarily by lower transaction volume, partially offset by higher air fares.

(b) The increase in domestic non-air gross bookings for the three and nine months ended September 30, 2012 was due primarily to higher hotel and vacation package volume.

(c) For the three and nine months ended September 30, 2012, international air gross bookings were impacted by unfavorable foreign currency fluctuations in the European market as compared with the prior-year periods. For the three months ended September 30, 2012, unfavorable foreign currency fluctuations and lower transaction volume were partially offset by higher air pricing. For the nine months ended September 30, 2012, unfavorable foreign currency fluctuations were partially offset by higher air pricing and higher transaction volume.

(d) For the three and nine months ended September 30, 2012, international non-air gross bookings were impacted by unfavorable foreign currency fluctuations in the European market as compared with the prior-year periods. For the three months ended September 30, 2012, unfavorable foreign currency fluctuations were partially offset by higher pricing. For the nine months ended September 30, 2012, higher pricing and higher transaction volume were partially offset by unfavorable foreign currency fluctuations.


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(e) For the three months ended September 30, 2012 and 2011, $28.1 million and $29.9 million of our total net revenue, respectively, was from incentive payments earned for air, car and hotel segments processed through GDSs. For the nine months ended September 30, 2012 and 2011, $90.6 million and $97.2 million of our total net revenue, respectively, was from incentive payments earned for air, car and hotel segments processed through GDSs.

Net revenue decreased $4.6 million for the three months ended September 30, 2012 compared with the three months ended September 30, 2011, and it decreased $0.6 million for the nine months ended September 30, 2012 as compared with the nine months ended September 30, 2011. Excluding unfavorable foreign exchange fluctuations, revenue increased by $0.3 million and $8.8 million, respectively, for the three and nine months ended September 30, 2012 from the comparable prior-year periods.

Air. Net revenue from air bookings decreased $1.9 million and $4.4 million for the three and nine months ended September 30, 2012, respectively, as compared with the three and nine months ended September 30, 2011. Excluding the impact of foreign currency fluctuations, net revenue from air bookings decreased $0.2 million and $0.4 million for the three and nine months ended September 30, 2012, respectively, from the comparable prior-year periods.

Domestic air net revenue decreased $0.4 million and $1.6 million for the three and nine months ended September 30, 2012, respectively, as compared with the three and nine months ended September 30, 2011. These decreases were due primarily to lower transaction volume and, for the nine-month period, the absence in 2012 of the incremental incentive revenue earned per segment processed through Travelport GDSs from December 2010 through June 1, 2011. The lower domestic transaction volume for the three and nine months ended September 30, 2012 was driven primarily by lower U.S. OTC channel volume and changes we made with respect to certain revenue management strategies. Additionally, for the third quarter, air volume declined due to certain operational issues, which have since been resolved. The lower volume was partially offset by higher net revenue per airline ticket, primarily resulting from these revenue management strategies, and the recognition of $2.6 million due to a reduction in our unfavorable contract liability resulting from the negotiation of a new agreement with one of our airline suppliers (see Note 6 - Unfavorable Contracts of the Notes to the Consolidated Financial Statements).

International air net revenue decreased by $1.5 million for the three months ended September 30, 2012 as compared with the three months ended September 30, 2011 (an increase of $0.2 million excluding the impact of foreign currency fluctuations). International air net revenue decreased by $2.8 million for the nine months ended September 30, 2012 as compared with the nine months ended September 30, 2011 (an increase of $1.2 million, excluding the impact of foreign currency fluctuations). On a constant currency basis, the increase in international air net revenue for the third quarter of 2012 was due primarily to higher revenue per ticket, partially offset by lower transaction volume. For the nine months ended September 30, 2012, the increase in international air net revenue was driven primarily by higher transaction volume.

Hotel. Net revenue from hotel bookings increased $2.1 million or 4%, and $7.1 million or 4%, for the three and nine months ended September 30, 2012, respectively, compared with the three and nine months ended September 30, 2011. Excluding the impact of foreign currency fluctuations, net revenue from hotel bookings increased $3.0 million and $8.6 million for the three and nine months ended September 30, 2011.

For the three and nine months ended September 30, 2012, domestic hotel net revenue increased $2.8 million and $10.0 million as compared with the three and nine months ended September 30, 2011, respectively. These increases were due primarily to higher net revenue per room night.

International hotel net revenue decreased $0.7 million and $2.9 million for the three and nine months ended September 30, 2012, respectively, as compared with the three and nine months ended September 30, 2011 (an increase of $0.2 million and a decrease of $1.4 million, respectively, excluding the impact of foreign currency fluctuations). For the three months ended September 30, 2012, the increase on a constant currency basis was due to growth in stayed room nights at ebookers and higher net revenue per room night, partially offset by lower stayed room nights at HotelClub. The decrease on a constant currency basis for the nine months ended September 30, 2012 was due to lower stayed room nights at HotelClub, partially offset by growth in stayed room nights at ebookers and higher net revenue per room night.

Vacation package. As compared with the three and nine months ended September 30, 2011, net revenue from vacation package bookings increased $1.0 million or 3%, and $8.3 million or 9%, for the three and nine months ended September 30, 2012, respectively. Excluding the impact of foreign currency fluctuations, net revenue from vacation package bookings increased $2.1 million and $10.1 million for the three and nine months ended September 30, 2012, as compared with the three and nine months ended September 30, 2011.


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Domestic vacation package net revenue increased by $0.5 million and $4.9 million for the three and nine months ended September 30, 2012, respectively, as compared with the three and nine months ended September 30, 2011, driven primarily by increased transaction volume, partially offset by a shift in package mix to lower margin packages.

International vacation package net revenue increased $0.5 million and $3.4 million for the three and nine months ended September 30, 2012, respectively, as compared with the three and nine months ended September 30, 2011 (an increase of $1.6 million and $5.2 million, respectively, excluding the impact of foreign currency fluctuations). These increases were due primarily to higher transaction volume for ebookers.

Advertising and media. Advertising and media net revenue remained flat and increased $0.5 million or 1%, for the three and nine months ended September 30, 2012, respectively, compared with the three and nine months ended September 30, 2011. The increase for the nine-month period was driven by higher display advertising.

Other. Other net revenue is comprised primarily of net revenue from travel insurance, car bookings, cruise bookings, and destination services. Other net revenue decreased $5.8 million, or 17%, for the three months ended September 30, 2012 compared with the three months ended September 30, 2011 (a decrease of $4.8 million excluding the impact of foreign currency), and $12.0 million or 13%, for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 (a decrease of $10.3 million excluding the impact of foreign currency). The decreases were primarily driven by lower international car revenue, due largely to lower pricing, and lower insurance revenue. Insurance revenue decreased year-over-year due to a new regulation issued by the Department of Transportation effective in January 2012 that no longer allows for the travel insurance option to be pre-selected, which reduced the attachment rate for insurance products. In addition, for the nine-month period, revenue from hosting services decreased from the prior-year period due to the termination of our last hosting agreement in July 2011.

Costs and Expenses

Cost of Revenue

Our cost of revenue is comprised of costs to operate our customer service call
centers, credit card processing fees and other costs, which include customer
refunds and charge-backs, hosting costs and connectivity and other processing
costs.
                           Three Months Ended           Increase/              Nine Months Ended            Increase/
                              September 30,             (Decrease)               September 30,              (Decrease)
                            2012          2011          $         %            2012          2011           $         %
Cost of revenue:                   (in thousands)                                      (in thousands)
Customer service
costs                   $   16,299     $ 13,766     $ 2,533      18  %     $   43,111     $  41,697     $ 1,414       3  %
Credit card
processing fees             11,913       12,389        (476 )    (4 )%         36,121        36,782        (661 )    (2 )%
Other                        9,991        9,940          51       1  %         30,472        29,427       1,045       4  %
Total cost of revenue   $   38,203     $ 36,095     $ 2,108       6  %     $  109,704     $ 107,906     $ 1,798       2  %

Cost of revenue increased $2.1 million (a $2.9 million increase excluding the impact of foreign currency fluctuations) for the three months ended September 30, 2012 compared with the three months ended September 30, 2011, due primarily to a $2.5 million increase in customer service costs to support the growth in our private label distribution channel, partially offset by a $0.5 million decrease in credit card processing fees.

Cost of revenue increased $1.8 million (a $3.5 million increase excluding the impact of foreign currency fluctuations) for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011, due primarily to a $1.4 million increase in customer services costs and a $1.1 million increase in customer refunds and charge-backs, partially offset by a $0.7 million decrease in credit card processing fees.


Table of Contents

Selling, General and Administrative

Our selling, general and administrative expense is comprised of wages and
benefits, contract labor costs, network communications, systems maintenance and
equipment costs and other costs, which include professional fees, foreign
currency transaction and hedging and other administrative costs.
                            Three Months Ended            Increase/               Nine Months Ended             Increase/
                               September 30,              (Decrease)                September 30,              (Decrease)
                             2012          2011           $          %            2012          2011           $          %
Selling, general and                 (in thousands)                                       (in thousands)
   administrative:
Wages and benefits (a)   $   33,420     $ 36,291     $  (2,871 )    (8 )%     $  109,212     $ 114,184     $ (4,972 )    (4 )%
Contract labor (a)            6,861        7,311          (450 )    (6 )%         20,499        19,989          510       3  %
Network
communications,
systems
   maintenance and
equipment                     7,335        6,765           570       8  %         21,111        19,458        1,653       8  %
Other                         9,455       17,312        (7,857 )   (45 )%         43,874        50,549       (6,675 )   (13 )%
Total selling,
general, and
   administrative        $   57,071     $ 67,679     $ (10,608 )   (16 )%     $  194,696     $ 204,180     $ (9,484 )    (5 )%

(a) The amounts presented above for wages and benefits and contract labor are net of amounts capitalized related to software development.

Selling, general and administrative expense decreased $10.6 million (a $9.1 million decrease excluding the impact of foreign currency fluctuations) for the three months ended September 30, 2012 compared with the three months ended September 30, 2011. This decrease was driven primarily by a $5.3 million decrease in professional fees, a $2.9 million decrease in wages and benefits, a $1.2 million decrease in foreign currency losses and hedging costs and a $0.5 million decrease in contract labor costs, partially offset by a $0.6 million increase in network communications, systems maintenance and equipment costs. The decrease in professional fees was due primarily to a $5.0 million insurance reimbursement received for costs previously incurred to defend our hotel occupancy tax cases. No such reimbursement was received during the three or nine months ended September 30, 2011, and we will not receive any additional insurance reimbursements in future periods as our related insurance coverage limits have been reached. Wages and benefits and contract labor costs decreased due to cost savings achieved from the migration of HotelClub to the global platform and lower incentive compensation.

Selling, general and administrative expense decreased $9.5 million ($6.4 million excluding the impact of foreign currency fluctuations) for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011. The decrease in expense was primarily driven by a $5.0 million decrease in wages and benefits, a $4.1 million decrease in professional fees, and a $1.4 million decrease in foreign currency losses and hedging costs, partially offset by a $1.7 million increase in network communications, systems maintenance and equipment costs. Wages and benefits and contract labor costs decreased due to the centralization of our finance function in our European operations in 2011,cost savings achieved from the migration of HotelClub to the global platform and lower incentive compensation. The decrease in professional fees was due primarily to a $5.0 million insurance reimbursement received for costs previously incurred to defend our hotel occupancy tax cases.

Marketing

Our marketing expense is primarily comprised of online marketing costs, such as search engine marketing, travel research and affiliates, and offline marketing costs, such as television, radio and print advertising. Our online marketing spending is significantly greater than our offline marketing spending. Marketing expense increased $1.3 million ($3.1 million excluding the impact of foreign . . .

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