Orbitz Worldwide Inc. Q3 2008 Earnings Call Transcript

Nov.11.08 | About: Orbitz Worldwide, (OWW)

Orbitz Worldwide Inc. (NYSE:OWW)

Q3 2008 Earnings Call

November 10, 2008; 05:00 pm ET

Executives

Steve Barnhart - President and Chief Executive Officer

Marsha Williams - Chief Financial Officer

Shannon Barnes - Director of Investor Relations

Analysts

Imran Khan - JP Morgan

Brian Fitzgerald - Bank of America Securities

Mark Mahaney - Citi

Doug Anmuth - Barclays Capital

Jennifer Watson - Goldman Sachs

George Askew - Stifel Nicolaus

Van Edelson - Morgan Stanley

Michael Millman - Soleil Securities

Frank Duplak - Prudential Financial

Operator

Good afternoon. My name is Christine and I will be your conference operator today. At this time I would like to welcome everyone to the Orbitz Worldwide third quarter earnings conference call. (Operator Instructions) Ms. Burns, you may begin your conference.

Shannon Burns

Thank you. Good afternoon and thank you for joining us on the Orbitz Worldwide third quarter 2008 earnings call. I am Shannon Burns, Director of IR for Orbitz Worldwide. On the call this afternoon are Steve Barnhart, President and CEO of Orbitz Worldwide and Marsha Williams, the company’s Chief Financial Officer.

Before we get started I would like to remind you of a few items. First, the rebroadcast, reproduction or retransmissions of this conference call or the webcast without the expressed written consent of Orbitz Worldwide are strictly prohibited. Second, we filed a press release this afternoon detailing our third quarter results. If you had not received this press release, it is available on our Investor Relations website at www.orbitz-ir.com. Additionally, this webcast will be archived on the site for a period of at least 30 days and an MP3 file of the call and a transcript will also be posted on our site.

Third, some of the statements made during this call constitute forward-looking statements that involve known and unknown risks, uncertainties and other factors, including the Risk Factors described in our Form 10-K/A filed with the Securities and Exchange Commission on August 28, 2008.

These risks and uncertainties may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement. Also, I would remind you that the media are participating in this call in a listen only mode.

Finally, during the call we will be referencing certain non-GAAP financial measures as defined by the SEC rules. Where required, we have provided in our press release or on our web site a reconciliation of those measures to the GAAP financial measures we consider to be the most comparable. This reconciliation is available on our Investor Relations website.

In order to give everyone an opportunity to ask a question during the Q-and-A, we request that you please limit yourself to one question and one follow-up question. At this time, I would like to turn the call over to Steve Barnhart, President and CEO of Orbitz Worldwide.

Steve Barnhart

Thank you, Shannon. We are pleased with our solid third quarter results. We hit our long-term target range for revenue growth and would have reported the net profit for the quarter without the impairment charge. Growth rates for hotel and car revenues accelerated over the second quarter in both the US and at Ebookers. Our European businesses also posted growth and revenues and we continue to achieve significant growth in our highly profitable advertising and insurance businesses.

I will review the details around our performance in the US and then talk about Ebookers in detail. Finally, I will discuss the outlook for the travel business, which given the current economic industry conditions is quite different than when we last spoke. Then Marsha will review our third quarter financial results and we will take your questions.

We have stated in our call this year that accelerating growth in our US business was a key goal for Orbitz Worldwide and that we expected to show improved growth each quarter throughout the year. Third quarter results show that our initiatives have been successful. These initiatives included launching Orbitz price insurance, creating more effective offline advertising that would drive more customers to book their travel with us and other site enhancements.

We also won the MSN business and now provide travel services on their travel sites in the US and the UK. In addition, we began to benefit from lapping the pullback in search marketing, which we started in the third quarter of last year.

We have also stated that increasing non-air and other net revenue, as a percentage of our total net revenue is a key goal and our results in the third quarter also demonstrate success. Non-air and other net revenue as a percentage of total net revenue reached 64% in the recent quarter, up from 61% in the second quarter of 2008 and a jump from 58% in the third quarter of 2007.

Price Assurance has performed in line with our expectations. As a result of this innovative functionality, which offers consumers a solution to one of their travel experience growth has strengthened on Orbitz.com.

Research indicates that the offline advertising we created to support Price Assurance is compelling the consumers and attracted additional traffic to our sites in the third quarter. This traffic created stronger bookings for both air and non-air products and we are pleased with the overall economic.

As an indicated of the broad reach of this innovative functionality, travelers on over 2,400 routes have received refunds since we launched Price Assurance and we are mailing thousands of checks to customers each month. This is a winning program for Orbitz and more importantly for our customers.

We continue to make excellent progress in monetizing the traffic on our site through advertising, which contributed to our growth in total non-air and other net revenue. Advertising revenue increased over 60% in the third quarter with the increase coming primarily from travel advertisers.

We saw strong growth from several sources. First we sold more advertising space on our sites and improved our pricing as we continued to add more high demand travel advertising to our sites. For example we have been successful in working with designation tourism advertisers, because we have demonstrated to them the value of reaching the Orbitz traveler.

International air carriers and other resource have also been strong advertisers as they invested to counter the impact of the weak dollar and attract more US tourists. Independent hotels have also increased their advertising spend, as hotel demand has softened.

In addition we added link-based advertising in our booking pass. Our goal is to monetize traffic that is browsing, without distracting customers who are on our site to book travel on that business. We continue to test this concept to find the balance that maximizes both the customer experience and our return.

We expect advertising will continue to be an ongoing source of strong revenue growth with attractive margins. We are continuing to evolve our advertising product offering to further enhance the experience for our customers with additional relevant information provided by our ads and for our partners in terms of higher conversion of bookings on our site.

Orbitz for Business had another successful quarter adding new accounts. While we have seen corporate clients reduce their travel, total net revenue was roughly flat in the quarter compared to the prior year, as we offset that decline with business from new clients including PETCO. Our customer retention rate continues to be very high and in a recent survey, our customer satisfaction scores was the highest ever

In the international portion of our business Ebookers gross bookings increased 26% in the quarter. This is the eighth consecutive quarter of 20% plus growth. Financial progress at Ebookers has been solid, as both revenue growth and operating expense reductions have resulted in shrinking losses.

Ebookers is positioned to improve its performance in 2009. We have nearly completed the migration to the new technology platform with only four countries left to launch. We expect to have all countries launched into the new platform by year-end.

As discussed on previous calls the global technology platform provides Ebookers customers with access to broader hotel selections and dynamic packaging capabilities and automation of a number of back end processes resulting in cost efficiencies. These benefits bode well for continuing financial improvement in 2009; however, given the difficult markets, it will be more challenging for Ebookers to meet their goal of becoming profitable at some point in 2009.

Turning towards HotelClub, that business experienced a market slowdown throughout the third quarter as a result of competitive pressures and the deteriorating economic situation. During 2008, we are focused on transitioning the majority of HotelClub hotels from third party sources to direct contracts with Orbitz Worldwide. We believe our prior reliance on third party sources was a distinct disadvantage, particularly as the industry conditions have slowed versus having direct relationships in place.

While transitioning these contracts have consumed significant resources, this process was necessary to establish the right long-term economic end relationships. We will be largely through this transition by the end of this year, at which point our hotel sourcing resources will be able to focus on working with our hotel partners to actively manage pricing, promotions and availability across our portfolio brand.

Also, over the next few quarters, we will be refreshing our HotelClub and rates to go sites and introducing new product capabilities that we believe will materially improve the customer experience. That brings me to a discussion of the travel industry outlook. Our businesses globally performed inline with our expectations through September, when we had anticipated softening in the US as airlines have moved capacity from the system.

The business around the world softened further in October; coincident with increased turmoil in the financial markets. As many companies have noted, with the global recession and increasing concern and the financial markets continuing to be in turmoil, consumers and businesses have pulled back on their travel.

In short, the strategies we’ve been following this year to accelerate our growth in the US had us track through the end of September to meet our goal and we expect these strategies will continue to be successful. However, the economy is clearly worse then what was evident that we spoke in July and we are not counting on any material improvements in the economic conditions in the near term.

In response for the deterioration in the outlook for the travel market, we will be making immediate cuts in our operating expenses and reducing our US staffing by approximately 10% in the next six weeks. We anticipate these actions will take approximately $20 million out of our annual payroll expenses. We will have further reductions in operating expenses that we are also in process of implementing.

Most of the workforce reduction will take place in our corporate offices in Chicago, which is our largest location. We will reduce our entire infrastructure in anticipation of lower volume and are adjusting our technology development investments, resizing them based on our current view of the business opportunities. Much of our technology spending is for new product development rather than for maintenance or support so we have significant flexibility in both the level and timing of these investments.

Although we achieved our target growth rate for net revenue in the third quarter, we do not expect to reach that long-term target range of 9% to 12% growth in gross bookings and net revenue, again until economic conditions improve. We are still holding to our long-term goal of reaching an EBITDA margin in the mid20s driven by mixed shift towards more non-air mix and business and benefits from scale. However, given the current economy and the outlook for 2009, we are less confident that we will hit that target in the next four years.

Although this is a difficult period for the travel industry as it is for many industries, we continue to firmly believe in the long-term growth prospects for online travel and for Orbitz. We had a solid third quarter, during which the initiatives we launched to accelerate domestic growth proved successful. We continue to see solid growth in non-air and other net revenue led by advertising, sales and we continue to witness the positive impact the new global platform is having on our Ebookers business.

We believe that our millions of loyal customers appreciate the value we provide. We also believe that the favorable underlying growth in global travel and the continuing switch from offline to online booking, will allow us to again deliver strong top line and bottom line growth when the global economy recovers.

Lastly, I want to welcome Jeff Davidoff, our new Chief Marketing Officer to the Orbitz senior leadership team. Jeff brings to Orbitz a long career and consumer branded products including an entrepreneurial background as founder of his own advertising agency. We are excited by the contributions; we believe Jeff will make to our product and marketing initiatives.

Now I will turn the call over to Marsha to discuss some of the financial details of the quarter.

Marsha Williams

Thank you, Steve and thanks for joining us today. We are pleased to report adjusted EBITDA of $43 million for the third quarter, which is a significant improvement over the first two quarters of this year and equal to the record quarterly adjusted EBITDA we reported in the third quarter of last year. Our gross bookings grew 4% this quarter, compared to the third quarter of last year.

Our international gross bookings, which have been strong all year, did slow a bit in the third quarter. We posted an overall growth in the international gross bookings at 16% over the third quarter of last year, driven largely by a 26% growth at Ebookers, excluding the impact of Travel Bag, which we sold in the third quarter of last year.

As we mentioned in prior calls, business has been a bit slower this year at HotelClub and third quarter gross bookings declined 9% versus the third quarter of last year. Overall net revenue increase 9% in the third quarter of 2008 compared to the same quarter in 2007. Again, this is a much better performance then the 2% year-over-year revenue growth we reported in the first half of 2008.

Growth in international net revenue was 15% in the third quarter. After adjusting for foreign currency fluctuations international net revenue increased 10% in the quarter. Domestic net revenue was $187 million, which is an increase of 7% from the 2007 third quarter. This return to growth in our domestic revenues is evidence of the success of a number of initiatives we launched during the year to both strengthen and grow our domestic business.

Globally our strongest revenue growth in the third quarter came from our dynamic packaging, car and domestic hotel businesses. We also had another quarter of strong increases in our advertising and insurance revenues. Those businesses helped to contribute to our 19% increase in non-air and other net revenue, as compared to a growth of 11% in our non-air and other net revenue in the first half of 2008. The hotel business improved in the US and at Ebookers. Our international air net revenue was up nominally.

Turning to the rest of the income statement, our cost of revenues was 17% of net revenue. We continue to grow our white-label business, which resulted a higher commissions paid to our white-label affiliates, which is one component of cost to revenues.

SG&A expense increased 6% from the third quarter of 2007, which was slower than our growth in revenue. Wages and benefit increased year-over-year, primarily due to higher staffing levels in both our hotel sourcing team and within certain public company functions. Marketing expense increased $8 million or 10% from the third quarter. This increase was due to our domestic ad campaign, which we launched in the third quarter of this year to fully support Price Assurance.

Internationally, our offline marketing expense decreased compared to the third quarter of 2007, when we initiated an offline campaign to support the launch of the new global platform in the UK. As I mentioned, third quarter 2008 adjusted EBITDA was $43 million. Net interest expense in the third quarter was $16 million. Interest expense includes cash interest of $11 million, primarily on our $600 million term loan and non-cash interest of approximately $5 million, primarily due to interest that accretes on our tax sharing liabilities with our funding airlines.

In the third quarter we entered into an additional interest rate swap to take advantage of lower interest rates, this new swap fixes an additional $100 million of our term loan at 5.98% for two years, which is inclusive of our 300 basis point spread on the term loan. As a result we now have 500 of our total $600 million term loan on a fixed rate basis. With the new swap in place the weighted average rate on our term loan is currently approximately 7.2%.

As you saw in our press release, we recoded a third quarter non-cash impairment charge of $297 million to reduce the carrying value of goodwill and intangible assets on our balance sheet as of September 30.

On at least an annual basis companies are required to access the balance sheet values assigned to goodwill and other intangibles. We generally perform that analysis in the fourth quarter of every year; however, as the economic softened, the travel industry outlooks weakened and we experienced a prolonged decline in our stock price. It become clear as we were preparing our financial statements that we needed to perform our evaluation in the third quarter of this year.

The majority of this charge reflects the reduction of goodwill on the books at both our domestic and international subsidiary. This goodwill was created when these business where acquired from Cendant in August 2006. Although, this charge creates a GAAP loss in an otherwise profitable quarter, it is a non-cash accounting charge and has no impact on our cash position, our loan agreement or our loan covenant calculations.

We were comfortably in compliance with our loan covenants at the end of the third quarter and also believe that we have sufficient liquidity to operate our business. At the end of the third quarter we had cash, net of our revolver borrowings of $77 million, which is an increase of $33 million as compared to our cash balance of $44 million at September 30, 2007. Because of the seasonal pattern of our business, we billed our cash position in the first half of the year and then used that cash during the remainder of the year. Our cash balances reflect our normal seasonal trends.

Our merchant payables follow the same season of patterns as our cash balances. Both bills in the first half of the year as customers book their vacation travel and then decline in the third and fourth quarters, as customers complete their travel and the hotel bill us. Merchant payables declined 17% from the June 30, 2008 level.

Turning to the cash flow statement, for the first nine months of this year, we generated cash from operations of $121 million, which is the sharp increase in the $65 million of cash from operations we’ve reported in the first nine months of last year.

Capital expenditures in the third quarter were $16 million up from the $10 million in the third quarter of last year, which reflects the fact that we continue to invest in our sites to build additional customer facing technology.

Also as Steve discussed given the current economic climate, we have decided to take a very hard look at all of our operating costs including payroll costs. As the result, we are reducing our headcount in the US by approximately 10%. These reductions will occur before year-ends and we are notifying our affected employees this week. In connection with this move, we expect to take a severance charge of approximately $2 million to $3 million in the fourth quarter. We anticipate this action will reduce our 2009 labor related expenses by approximately $20 million.

We will have additional operating expense reductions, which we’re in the process of implementing. Although these headcount reductions are very difficult steps to take, we believe that they are necessary given the uncertain outlook for the economy in general and for the travel industry specifically.

Steve will have some closing comments, but now we would like to take your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Imran Khan - JP Morgan.

Imran Khan - JP Morgan

I was trying to understand, what are the key factors that drive in the domestic non-air and other net revenue growth rate and then the second question is how much growth do you expect to come from MSN and what kind of profitability is associate with MSN revenue? Thank you.

Steve Barnhart

On the net air growth, advertising dynamic packaging and hotels are the largest drivers of the strong non-air growth in the quarter. As far as, MSN; MSN does have the ability to use Farecast on the site and we have the right to be on MSN and on Farecast. So we’ll be present in the results either way, whether MSN is using the Farecast alternative or just showing the results of Orbitz, but beyond that we’re not going to specifically give you numbers as to the size before to the profitability of the relationship.

Operator

Your next question comes from Brian Fitzgerald - Bank of America Securities.

Brian Fitzgerald – Bank of America Securities

In terms of your international gross bookings they were up on both volume and higher price as you said. I was wondering if you can give us a little more granularity on the breakdown of those increases in volume and prices in terms of air versus hotels versus packages and some of the international side and maybe including some commentary on ADRs and occupancy rates. Thanks.

Marsha Williams

In terms of the international gross bookings, the book volume and rate are really going to be more out of our Ebookers business, which is growing on both of those fronts, in air as well as packaging where it has a smaller base and is getting very good growth in hotels, particularly where we’ve added more inventory with the new platform, a lot of that coming out of growth in the US. Those will be the strongest drivers behind that.

As far as ADRs, in fact it’s very difficult give a good summary view of ADRs across our different international hotel business, but the stronger growth we are seeing is from volume and price at the Ebookers business.

Operator

Your next question comes from Mark Mahaney - Citi.

Mark Mahaney – Citi

As you think about different steps you need to take, you mentioned some of personal steps, corporate steps in this economic environment. Do you have to contemplate or do you have any thoughts on changes in your marketing mix, different channels you would want to use, would you want to accelerate any particular moves there or decelerate others? Thank you.

Marsha Williams

In terms of marketing we continue to manage our marketing, looking at both our online and offline investment. In the online space we’ll continue to manage that for maximum efficiency. As we have, we saw that last year we pulled back when pricing in the US became much higher and we continue to assess that on a regular basis.

As far as offline, we want to continue to invest to grow our businesses. So, we will continue to run our offline programs and drive that piece of our business. So, I don’t see any radical change of our approach to marketing. I think we are going to assess each area of expense in our business, but we plan to continue to make the investments that we feel are appropriate to grow the business for the long-term.

Mark Mahaney – Citi

And Steve, in terms of customer demand on the site, have you seen a clear trade down mentality? Have you seen people to the extent that for the same bookings, do you see people materially looking to do cheaper itinerary, shorter itineraries, is there a shorter bookings period or bookings window? Thank you.

Steven Barnhart

We’ve seen consumers make a few adjustments, they’re not completely consistent across different products. On the air side where we’ve launched Price Assurance we had seen consumers lengthen their booking window. So, we see pretty clear evidence of consumers responding to Price Assurance by taking advantage of that protection and lengthening their booking window and when we look at packaging, we also see consumers lengthening their booking windows more; more the purchase is coming in the 60 plus days window.

When you look at hotels we’ve actually seen some bounce back in the shortest-term window as well, the zero to three day windows, which may indicate consumers again waiting till last minute to see if they can find a value.

Marsha Williams

The other thing I would just add, and Steve touched on this briefly, is we have seen a good strong growth in our dynamic packaging products this quarter and we think that reflects fact that as consumers shop our site they see the value inherit in some of the packages that they are able to find and we think in part that behavior reflects what’s going on in the economy, because there are genuine values there.

Operator

Your next question comes from Doug Anmuth - Barclays Capital.

Doug Anmuth - Barclays Capital

A couple questions; first, on Orbitz Price Assurance, can you just remind us how that’s being recognized in your financials, I think its contra revenue, but I just want to clarify that and was hoping that you could give us an idea of how much growth would be without that deduction in there or essentially how much is Price Assurance actually costing you right now?

Secondly, can you just clarify on Ebookers, when you actually expect to get some profitability in that business and then third, free cash flow that’s related to the hotels, are you seeing any kind of change in the window or the time period that merchant hotels are looking for their payment from you guys? Thank you.

Steven Barnhart

Thanks, Doug. I’ll take the second one and I’ll turn it over to Marsha for the first and third. On Ebookers what we’ve said in the past is that we expect to get to profitability at some point in 2009. Now with the unsettled conditions in the marketplace, it becomes less difficult to be as confident, we will get to breakeven at some point in 2009, but that is still our goal for the business.

Marsha Williams

In turning to the first point, which I think was how we are accounting for Price Assurance. Price Assurance is contra revenue, so the refund checks that we send out to our customers do count against our revenue. We haven’t really very clearly articulated exactly how much we are sending out in refunds every month, we can’t say that we are continuing to send thousands of checks and we believe that this product is continuing to resonate with our customers and we continue to be very pleased with the results from it.

In terms of the hotels, we really are not seeing any change in payments from our hotel here. So thus far throughout the year, its normal in terms of our payment terms with the hotels.

Operator

Your next question comes from Jennifer Watson - Goldman Sachs.

Jennifer Watson - Goldman Sachs

Just two questions for you. One, on the advertising side of the business; can you talk a little bit about the opportunity that you still have in terms of increasing the inventory that you sell and where you think that pricing can go over time and then if you can just give a little detail in terms of the growth across various regions, in the past. You’ve broken out Continental Europe versus the UK in terms of revenue growth, if you could just talk a little bit about that?

Steven Barnhart

Sure. Jennifer, thank you. As far as the advertising opportunity, we have been working on each of our sites to both improve the quality of the ad units and the type of inventory we’re supplying, as well as adjust where those ads are placed to make them more valuable for advertisers.

We do see continued opportunity on all of those fronts, as well as we can still increase the utilization of the inventory of advertising on our sites. Particularly, in the international markets, we are less developed on all those fronts than the US; we have a lot of running room on our international sites in terms of advertising.

In terms of growth across the regions, we’re not giving a specific breakdown on this call on that. We will still see the UK market as being more challenged than Continental Europe, but part of the additional slowdown in October was Western Europe as well as, Asia beginning to slowdown as well. So, that additional deceleration we saw was probably more focused on those markets than it was in the UK where we had seen slowdowns earlier in the year.

Operator

Your next question comes from George Askew - Stifel Nicolaus.

George Askew - Stifel Nicolaus

Steve could you share with us please the amount of non-air, non-travel revenues that the company is generating?

Steve Barnhart

The statistics we gave you last time, what we tried to focus on was what percentage of revenue was US domestic air only leisure travel. Now that has dropped to 19% of revenue in the third quarter of 2008 as opposed to 22% in the third quarter of last year, so I think it you gives you the inverse of what you’re looking forward, is that correct?

George Askew - Stifel Nicolaus

May be more specifically can you quantify the dollars of advertising revenue for example or insurance? I’m just think the high margin indirect travel dollars that you’re generating; for example 60% growth in advertising; what kind of base we you talk about there?

Steve Barnhart

I’m sorry George, I was thinking non-air, you’re asking for non-travel. We have not broken those numbers out; we are not prepared to break them out for you at this time, but we do think we continue to generate strong growth in those areas. We have seen very strong through the year and we would expect to continue to be able to drive those fairly well over the near term future.

George Askew - Stifel Nicolaus

Okay, great. On the international front, is Mr. Jeff being upgraded along with the other Ebookers countries?

Steve Barnhart

Yes, that’s right. So, there are four remaining countries left to launch on the platform and the markets where we operates Mr. Jeff name are part of that. So, Mr. Jeff will move on to global platforms as well.

George Askew - Stifel Nicolaus

Okay and how are you handling the currency headwinds in Europe, with regard to hedging or some of the challenges obviously you may face in 2009; are you hedging there? How would that impact your growth rates?

Marsha Williams

Well. Let me just comment on a couple ways. Well we do hedge and we hedge primarily, our balance sheet positions in the number of currencies and we detail what our hedging is in the 10-Q, but we have a hedging program in place both at Ebookers and at HotelClub, because we do obviously do business in multiple currencies around the world.

Because we are continuing to grow of our international business, it doesn’t have as big impact on us as perhaps some other people, but as we are planning our 2009 budget, obviously we are taking into consideration, what’s happened with exchange rates over the last couple of months, where they’ve been very volatile and we generally hedge on sort of 30 day increment, so as we see rates move we can adjust our hedges appropriately.

Operator

Your next question comes from Van Edelson - Morgan Stanley.

Van Edelson - Morgan Stanley

Just regarding the reduced spending, plan on discretionary IT projects, are there any intangible implications. Clearly its money you would want to spend during better times, so are there any competitive or market facing implications associated with not spending that money?

Steve Barnhart

Clearly the challenges we implemented just do it in a way that protects the development and the work we do that is most valuable to our consumers and in fact we are reshaping our technology plans with that in mind.

We expect to continue to bring work in the market, pieces of the innovation that are more customer focused in orientation and the things we’ll differ will more back office focused or infrastructure focused that they have less immediate values to consumers. So, we feel that we can do this without materially detracting from our ability to continue to drive, the consumer experience and drive track into our sites.

Van Edelson – Morgan Stanley

Okay, and the CapEx that was up the past year, is the customer facing initiatives that’s a separate category and it’s like we need to continue to grow, I would guess?

Marsha Williams

If you look at our capital, there are really three major buckets, the largest of which is capitalized labor where we are building technology and then we also have capital for infrastructure and then for hardware and then for software purchases. As we reduce our overall labor spend, you would see a corresponding reduction in capitalized labor, but again we’ll do that very mindful continuing to able to drive innovation that will continue to engage the consumer on our site.

Operator

(Operator Instructions) Your next question comes from Michael Millman - Soleil Securities.

Michael Millman - Soleil Securities

This is Michael Millman with Soleil Securities. I guess the broad question is a couple of follow-ups is can you talk about what you think the weak markets over the next “year” or very weak markets in travel are going do to competitive positioning coming out of these weak markets, considering the dynamics of some of the companies managements and cash.

In terms of just some short things, it seems from the press release that you’re cash interest expense was $35 million, but you mentioned $11 million, so you might be able to reconcile that number and also am I correct that the continuing EPS it like its about $0.12? Thank you.

Steven Barnhart

Mike, I’ll take the first piece of that and then I’ll let Marsha address the latter two. I wasn’t 100% clear, let me answer. In terms of markets, you ask about weak markets and what they will do. As we look at the travel industry, we do see regions around the world were travel has softened. We see more of those markets begin to aggressively react by reducing pricing either through packaging opportunities or promotional opportunities, that’s part of why our ADRs begin to come down in the third quarter.

So, more than earlier in the year, where we seen softness, we’ve seen more markets react to invest back to drive traffic into those market. So, we’ll continue to work with each of those markets and help them move the rooms and sell those hotels. Does that get the first part of your question?

Michael Millman - Soleil Securities

Actually, I was thinking more about the OTA’s.

Steven Barnhart

Can you be more specific?

Michael Millman - Soleil Securities

Well for example price line has had traffic momentum and Expedia is very large and a single willingness to spend and so when we come out of this, it’s kind of curious of how you select that maybe if you thought that a competitive position between a list of three public OTA’s would changed and if so, how so?

Steven Barnhart

Well, as I look at most recessions, there maybe some shakeout in the smaller competitors in a down cycle. Again, we plan to invest in our business both in technology and marketing and in right sizing our cost structure, to make sure that we’re very well positioned to move through that cycle and be a strong competitor both in the down cycle and as we have the chance to drive stronger growth if the category recovered. So, we’re going to make sure that we’re well positioned to do that and compete effectively on that. So, with that Marsh do you want to address the other?

Marsha Williams

Sure. On the interest expense, the net interest expense for the third quarter was $16 million and that was cash interest of the $11 million. The $35 million really relates to year-to-date interest number. So, that was your first question and what was your second question?

Michael Millman - Soleil Securities

Second question, is it looks like that the early strike out makes roughly that the EPS before the impairment would have been about $0.12.

Marsha Williams

That sounds about right, I have to go back and double-check that calculation, but basically without the impairment, we wouldn’t had a profitable quarter and we did give you the post impairment loss and then the impairment number.

Operator

Your next question comes from Frank Duplak - Prudential Financial

Frank Duplak - Prudential Financial

Just two questions for Marsha. First, can you just run through your total liquidity for us?

Marsha Williams

Sure. We have a $600 million term loan; we have an $85 million revolver that is the total commitment amount. Of that $85 million, we did draw down approximately $30 million or put in the draw down request for $30 million during the quarter. Unfortunately Lehman was a lender in our revolver and they did not fund their commitments. So we ended up with borrowings of about $25.5 million to $26 million, but we’ve got the majority of the rest of that revolver un-drawn. So, we’ve got good amount of cash on the balance sheet, about $26 million of the revolver drawn and the remainder is un-drawn.

Frank Duplak - Prudential Financial

How much of the 85 was Lehman?

Marsha Williams

It was about 12.5.

Frank Duplak - Prudential Financial

So, you have $72.5 million revolver, with 25 drawn, so 47 available?

Marsha Williams

That’s correct.

Frank Duplak - Prudential Financial

And then your cash position, can you just run through it. It looks like it’s 103 on the balance sheet, but then you mentioned something about 77 during the comments?

Marsha Williams

It was 103 at the end of the quarter, but that 103 did include the 26 that we had drawn.

Frank Duplak - Prudential Financial

Right, so 103 plus the 47 available, gives you 150 of liquidity at 930, is that fair?

Marsha Williams

That’s fair.

Frank Duplak - Prudential Financial

Okay and can you just remind me, you said you were in compliance with your leverage covenant; can you just remind me what that leverage covenant was and where you were at the end of the quarter?

Marsha Williams

We don’t actually disclose our covenant calculations, but the covenants step-down overtime and they step down later in the year, but we are comfortably in compliance with both our interest coverage ratio and our debt to EBITDA ratio.

Frank Duplak - Prudential Financial

And then what do you do in ‘09, when it steps down it looks like another chunk here. If you have weakening market environment, kind of how do you plan on dealing with that? It looks like there’ll potentially be a covenant issue in early ‘09?

Marsha Williams

Well again we believe we’ve got ample liquidity to manage our business, the way that we need to think about our covenants is that they are calculated on a trailing fourth quarter basis. So, it’s not a point in time calculation, but rather as you’re calculating the Q1 ‘09 covenants, you have one quarter of ‘09 and three quarters of ‘08. So, again we feel comfortable with where we are vis-à-vis our covenants today.

Frank Duplak - Prudential Financial

Okay. I can’t just take the company adjusted EBITDA for the last 12 months and take that versus debt and that would be in the calculation. Is there add backs over and above your company adjusted EBITDA?

Marsha Williams

There are other add backs. The full definition of all the covenants is included in some other filings, so all of our loan agreements have been filed publicly, so you can look through those calculations. They’re fairly complicated calculation, but it isn’t necessarily the straight EBITDA that we announced. There are some add backs, some of which relate to our technology platform and offered things like that. So, it’s best to go through that loan agreement.

Frank Duplak - Prudential Financial

Okay, but I assume all the ad backs aren’t disclose so I couldn’t calculate it myself anyhow right?

Marsha Williams

That’s probably correct.

Frank Duplak - Prudential Financial

Okay and then any CapEx guidance for ‘09?

Marsha Williams

I think, we’re in the process again as Steve said with some of the headcount reductions we announced today. We are still in the process of finalizing our ‘09 budget, so we probably aren’t position give you any of that guidance at this point, any of the capital spend guidance.

Frank Duplak - Prudential Financial

But directionally overall should we think lower spend next year or not necessarily?

Marsha Williams

I think that’s a reasonable assumption, yes.

Operator

(Operator Instructions) There appear to be no further questions at this time. Mr. Barnhart, please go ahead with any closing remarks.

Steve Barnhart

Thank you. As I described earlier, we’ve taken quick and decisive action to right size Orbitz worldwide, to operate successfully in the current more challenging economic conditions. This will cause us to be more focused in how we market to our customers and how we build new technology to continue to improve our customers travel experiences, but we will continue to invest in both these areas.

Travel remains an enormous category worldwide and Orbitz Worldwide remains one of the few companies well positioned to capture a certain share of the travel category all around the globe. We expect to be well prepared to weather the current economic conditions and equally well prepared to accelerate our growth when favorable market conditions return. Thank you all for joining us this afternoon.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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