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Orbitz Worldwide (NYSE:OWW)

Q4 2012 Earnings Call

February 14, 2013 10:00 am ET

Executives

Melissa Hayes

Barney Harford - Chief Executive Officer, President, Director and Member of Executive Committee

David Belmont - Interim Chief Financial Officer

Analysts

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

Naved Khan - Cantor Fitzgerald & Co., Research Division

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Brian Nowak - Nomura Securities Co. Ltd., Research Division

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Welcome and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. And I'd like to go ahead and turn the call over to your host for today, to Ms. Melissa Hayes, Vice President, Finance. Ma'am, you may begin.

Melissa Hayes

Thank you. Good morning, everyone, and thank you for joining us on the Orbitz Worldwide Fourth Quarter 2012 Earnings Conference Call. I'm joined on this call by Barney Harford, CEO of Orbitz Worldwide; and David Belmont, our Interim CFO. As many of you have seen, we filed our press release this morning detailing our fourth quarter results. If you have not received the press release, it is available on the Investor Relations portion of our website. Additionally, this webcast will be archived on the site for a period of at least 30 days.

Some of the statements made during this call constitute forward-looking statements that involve known and unknown uncertainties and other factors, including the factors described in our SEC filings. These risks and uncertainties may cause our actual results or performance to materially differ from any future results or performance expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise forward-looking statements.

Finally, during the call, we will be referencing certain non-GAAP financial measures as defined by SEC rules. We have provided in our press release or on our Investor Relations website a reconciliation of those measures to the GAAP financial measures that we consider to be the most comparable. I would now like to turn the call over to Barney Harford, CEO of Orbitz Worldwide.

Barney Harford

Thanks, Melissa. We're announcing today strong results for Q4 2012, both on the top line and the bottom line. We grew net revenue 7% year-on-year in Q4 and delivered 19% adjusted EBITDA growth. We're feeling good about the acceleration we're seeing in our business and about the momentum we're carrying into 2013. Our focus on hotel is bearing fruit. We're seeing acceleration in hotel across our business as we reap the benefits of our investment in the global platform and as our marketing optimization, site optimization and mobile initiatives bear fruit.

Standalone hotel revenue was up 18% year-on-year in the quarter. Revenue from hotel, both standalone and as part of a package, grew to 39% of total revenue for full year 2012, up 279 basis points from full year 2011. Stayed room night growth accelerated sequentially from flat in Q3 to up 7% in Q4. Q1 trends show continued acceleration. January stayed room nights were up 11%, while looking on a booked basis, a good leading indicator of future stayed room nights growth, January room nights were up 14%.

Our HotelClub turnaround is progressing well. HotelClub delivered positive stayed room night growth in Q4 and has continued to accelerate in Q1. Our new leader for this business, Nicholas Chu, has put in place a strong team around him. We're feeling increasingly optimistic about HotelClub's prospects with a strong loyalty-focused value proposition, offering customers up to 7% back on every booking.

Our U.S. distribution business is delivering strong room night growth, both organically and through new partner additions, including the American Express Consumer Travel Network. We have a robust pipeline of new distribution partnership opportunities. At Orbitz.com brand, we are achieving sequential improvement in stayed room nights in Q4 versus Q3 and continued improvement into February. On a booked basis, we've seen a very encouraging accelerating trends during Q4 and into Q1.

Now let me update you on our progress in technology, operations and new products. In 2012, we completed the migration of all of our consumer brands to the global platform. The platform is working well. We're reaping the benefits in terms of improvements in conversion and reiterating [ph] more rapidly. The platform is a major enabler of our marketing optimization, site optimization and mobile efforts. Orbitz.com now generates roughly 1/4 of its standalone hotel reservations through mobile channels. In some days of last December, the share transaction from mobile surpassed 1/3. In December, our iPhone app was one of 13 apps inducted into Apple's App Store Hall of Fame, making it one of only 48 apps ever to receive such recognition out of 700,000 in the App Store.

Now that we have all our businesses on the current platform and have launched American Express, we've been able to achieve some targeted cost reductions that will lead to cost of sales and SG&A leverage. These cost reductions position us well to achieve strong bottom line performance, while at the same time, being able to step up our marketing investments to drive further acceleration in hotel room night growth. This is particularly important, given the increasing competitive intensity in the online travel space.

On the product side, I wanted to share some details about the phase launch of our Orbitz loyalty program. We are focused on enhancing the relationship we have with our customers, ensuring we recognize and reward customers for their loyalty to the Orbitz brand. We have designed this loyalty program to provide easy-earn opportunities on almost all types of trips, while ensuring incentives are aligned with our strategic focus on hotel. From a financial point of view, we will start accruing contra revenue once we launch the program in Q1, and we expect to see the benefits in terms of high repeat rates and hotel attachments start to kick in later in the year.

Finally, I wanted to update you on the status of our CFO search. We expect to be able to announce a new CFO in the next few weeks. With that, let me turn the call over to David.

David Belmont

Thanks, Barney. Turning to the financial results for the quarter, adjusted EBITDA grew 19% year-over-year to $36 million and was towards the top end of the guidance range we provided on our last call. Net revenue came in at $190 million, which was up 7% from the fourth quarter of last year and exceeded the top end of our guidance range.

Moving to product performance on the quarter. Standalone hotel revenue was up 18% due primarily to higher volume. Global ADRs were up 1% in the quarter with domestic and international ADRs each up 1%. Vacation package revenue was up 4% year-over-year, driven by our ongoing strategic focus on beach destinations at ebookers and the strength and packages at our private label business. Standalone air revenue was up 1% in the quarter. Advertising and media revenue was up 22% due to strength in display advertising revenue, which was driven in part by new partnerships we entered into during 2012.

Other revenue declined 5% in the quarter, driven primarily by Department of Transportation regulatory changes for travel insurance that went into effect in late January 2012.

Turning to expenses. Cost of revenue as a percent of revenue was 20.1%, up 233 basis points from Q4 2011. This increase was due primarily to the growth in our private label distribution channel, and to a lesser extent, higher connectivity and processing costs. As you may recall, the air component of the American Express private label partnership is priced on a cost-plus basis and has a gross profit margin that is much lower than our overall business. Excluding the impact of these items, we would have achieved cost of revenue leverage in the quarter.

Marketing expense as a percentage of revenue was flat compared with Q4 of last year. SG&A expense decreased 1% year-over-year due primarily to lower wages and benefits and lower contract labor costs following the launch of the American Express private label partnership in the third quarter of 2012. These decreases were partially offset by negative year-over-year -- a negative year-over-year variance due to a $2.5 million insurance reimbursement we received in the fourth quarter of 2011 for legal costs related to hotel occupancy tax cases. As we indicated on our last call, we exhausted our insurance coverage in the third quarter of 2012 and will no longer receive these types of reimbursements in the future. We also incurred higher legal reserves in the quarter primarily due to an unfavorable excise tax ruling in Hawaii.

Finally, during the fourth quarter 2012, in connection with our annual impairment testing of goodwill and intangible assets, we concluded that the fair value of goodwill and intangible assets related to our domestic businesses was less than the carrying value of those assets. Accordingly, we recorded a $321 million noncash charge related to the impairment of goodwill and intangible assets.

Turning to the balance sheet. We ended the year with $130 million of cash and cash equivalents. We were in compliance with all of our debt covenants, and we expect to remain in compliance moving forward. We expect to pay down $25 million of our term loan in March of this year, which is required under our credit agreement based on our excess cash flow for the full year of 2012.

Turning to 2013 guidance. As we look to the first quarter, we expect net revenue between $194 million and $200 million and adjusted EBITDA between $17 million and $21 million. For the full year 2013, we expect net revenue growth between 2.5% and 5%, and adjusted EBITDA growth between 5% and 10%.

To provide some context around this financial outlook, we expect growth in global hotel and packaging to drive our revenue growth in the first quarter and for the full year. It is worth noting that our revenue guidance for the quarter and the year incorporates the contra revenue impact of the Orbitz loyalty program that Barney referenced earlier. While we expect the loyalty program to be accretive over the longer term, it will be a bit of a drag on both the top and bottom line in 2013. As Barney mentioned, we've been able to achieve some targeted cost reductions that will lead to cost of sales and SG&A leverage in the coming year. On the cost of sales front, we're taking advantage of efficiencies related to the global platform to allow us to engineer cost out of the business. This will, however, be offset by the American Express airline servicing revenue stream, which is on a cost-plus basis and is at a significantly lower margin than the rest of the business.

Net net, we expect cost of sales as a percentage of revenue to be relatively flat year-over-year. On the SG&A front, we expect to reduce SG&A as a percentage of revenue by about 300 basis points year-over-year. We will achieve this through reducing the level of our technology investment, now that we have completed our global platform migration and have launched the American Express private label site and through other targeted cost reductions. In connection with these cost reductions, we expect to incur one-time cash costs in the neighborhood of $4 million to $5 million. These costs will be added back for adjusted EBITDA purposes.

You'll note that the adjusted EBITDA growth in Q1 is a bit below the full year guidance. This is due in part to the DOT regulatory changes for travel insurance, which will impact the month of January in Q1, and the fact that the full year impact of the cost reductions won't be realized until Q3. This guidance assumes FX rates as of January 31.

With that, operator, we'd like to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question does come from Brian Fitzgerald with Jefferies.

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

As we looked at other travel companies reports through the quarter, they were talking about marketing deleverage. Sounds like you're still anniversary-ing some newer relationships. On the note, you could provide a little color there. And then, quickly, the AMR U.S. Airways merger, what does that -- how do you see that resonating through the OTA space?

David Belmont

Yes, on the marketing side in the quarter, we had -- part of what drove the marketing growth that we saw in the quarter, certainly, the launch of the American Express private label site in Q3. And we also did ramp up our marketing expense at our HotelClub business in the quarter as we've started to see some good performance and results with that business.

Barney Harford

And on American, I think this has been pretty widely anticipated. So not major news in general. We're not a fan of consolidation on the supply side, but it looks like this one is probably a fait accompli.

Operator

The next question comes from Naved Khan with Cantor Fitzgerald.

Naved Khan - Cantor Fitzgerald & Co., Research Division

Barney. Just on mobile, 1/3 of the booking's coming through to mobile. That's a pretty big number. Can you talk about the impact that mobile is having on your marketing efficiency? And whether it's actually helping or is actually -- is eroding the efficiency?

Barney Harford

Sure. So just to be clear, what we said is that mobile represents about 1/4 of our standalone hotel reservations in Orbitz. There were a couple of days in December when it achieved the level of 1/3, but that was kind of a spike up. In general, in terms of the impact on efficiency, it's still relatively early days in the mobile space. And so there's a fair amount of focus in particular on driving app downloads. And so that's something where -- when we spend money there, we're investing not just in the immediate transaction, but in the expectation of kind of lifetime value of that download. And that's stuff that we're able to deploy a fair amount of analytics against. There's also a few interesting aspects of mobile marketing just given that the tracking attribution is usually a little bit more complicated than they are necessarily on desktop. But it's somewhere -- we're absolutely applying a bunch of resources against. I wouldn't call out any specific overall impact on our marketing efficiencies and associated mobile though.

Naved Khan - Cantor Fitzgerald & Co., Research Division

Got it. And then can you talk about Europe and what you're seeing there in terms of the leisure travel environment? Is it about the same as in the prior quarters or has it changed?

Barney Harford

I think we're seeing a similar environment in the European markets. I think we're seeing particular strength in what we've been doing on the packages side of the business. But I think no major change to the broad European market conditions at this stage.

Operator

The next question comes from Dan Kurnos with The Benchmark Company.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Barney, maybe you could just give us a little bit more color on the hotel front on how ebookers performed in the quarter and the opportunity to maybe increase penetration in some of the less mature markets. And also, which geographies are gaining traction at HotelClub? And then I'll have a follow-up after that.

Barney Harford

Sure. I think in terms of ebookers -- the packaging business was driving more of the performance in the ebookers business. And in terms of what we're up to there, I think we're seeing some improving trends within the ebookers business recently. But as we had talked about a couple of quarters ago, that the European market is one where we've seen more muted growth given the economic environment over there. But recent trends in January, in particular, have been encouraging. In terms of HotelClub and what's driving growth there, I think there's a range of strategies that Nicholas and his team have been engaging on. Nicholas is a great leader and has got a broad range and really new ideas on how to drive acceleration in that business. As you know, it's a business we migrated to the global platform just over 1 year ago. And so our project [ph] in Argentina has been working on getting the platform working well for multilingual, multicurrency capabilities and promotional capabilities, et cetera. So I think that all this is coming together nicely. And we're feeling great about the way that, that business is turning around. And as a result, we're feeling good about stepping up our marketing investments there.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

And then one of your competitors does appear to be getting a little bit more aggressive in the private label and package space. So I'm just curious how much runway you think you have there? And your thoughts in general in the competitive landscape?

Barney Harford

Well, look, it's a competitive industry. So there's no surprises, it has always has been. I think we do, I mean, pretty well in the private label space. We're certainly not the only player that plays there, but I think we feel good about the wins that we've had. We talked about American Express partnership, but that's only one part of that business. And we're seeing strong growth within our U.S. distribution business in addition to what we're seeing with American Express, and we also have a great pipeline there. So I think it's certainly a competitive landscape, but I think we can do more than hold our own there.

Operator

[Operator Instructions] Next question does come from Brian Nowak with Nomura.

Brian Nowak - Nomura Securities Co. Ltd., Research Division

I have 2 questions. First on the 7% worldwide room night growth, I think that's the best you guys have done in a while. Can you talk a little bit to which region drove the improvement from the 0% growth you put up last quarter? And then, also, how big of a contributor was private label within that business? And then the second question, I guess, on private label is what -- can you help us at all in kind of what type of contribution from private label you guys are baking into your 2013 EBITDA guidance?

Barney Harford

Sure. In terms of what drove the acceleration of room night growth from 0% to 7%, and as we've talked about, we're also seeing accelerated trends into January, the 11% stay in January and 14% on a book basis. So our private label business was a factor as was acceleration at HotelClub as was improvement in the trajectory at Orbitz. So it was a broad set of kind of contributors to that acceleration. And in terms of breaking out what the relative kind of contribution levels to our businesses is by business. That's not something that we've provided historically, and we're not planning on doing so to stage. We provide some disclosures retrospectively on segment breakdown, but we're not going to guide at that level.

Brian Nowak - Nomura Securities Co. Ltd., Research Division

Okay. And one more, just kind of going back to SCM spend. Barney, I was wondering. Can you talk at all to kind of what you're seeing in the search market and kind of your SCM spending? Are you seeing any drop-offs at all in conversion ROI on your search spend in the bigger markets?

Barney Harford

What we're seeing in search engine marketing is really primarily driven, I think, by Orbitz-specific factors as opposed to market. We're feeling great about how our investments in algorithmic activities, I'll keep it up to my bidding [ph] as in KOBE, advanced analytics stuff are playing out. We're seeing significant growth in our search engine marketing channel and we're able to do that while maintaining efficiencies. And so, but I think that is probably more Orbitz specific. This is an area where, historically, we've been under-penetrated compared to some of our competitors. We think there's a significant opportunity there and we're quickly starting to catch up.

Operator

The next question comes from Michael Purcell with Stifel, Nicolaus.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

I may have missed this earlier, I had some technical problems getting on. But I'm not seeing the breakouts between non-air between domestic and international. And I was wondering if you can kind of give us a cadence there between occupancy and how that went for the quarter?

David Belmont

Yes. On the breakout there, the reason why we changed the presentation in this quarter, what we're showing is more consistent with what our competitors show. So I think what you're seeing now is what we're planning on showing, moving forward. I think on -- just to give some broad color there, on the international front, we had growth both on the air and non-air side. And then domestically, given the growth that we've seen with the OTC channel overall, over the course of the year, we've talked about the fact that, that is shrinking. And so, air is down as it has been all year, but that's reflective of the overall OTC channel rather than anything company specific.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And so follow-up, can we infer that international air was down as well or flattish? And I know you're going to present it differently going forward, I'm just kind of trying to true up for this quarter.

David Belmont

So on the international side, we had growth in both air and non-air.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's great. And then, last we spoke...

Barney Harford

You don't true up the constant currency component. Go ahead.

Michael B. Purcell - Stifel, Nicolaus & Co., Inc., Research Division

Last we spoke, the European hotel room booked nights had stabilized after decelerating through the summer. And I'm wondering, within your comments earlier about seeing better trends in the fourth quarter and especially January, how Europe is within that?

Barney Harford

As I said earlier on the call, we've seen muting in Europe -- muted trends in Europe largely driven by the economic environment. We have seen some improvement in that towards the end of the quarter and into early Q1.

Operator

There are no other questions at this time.

Barney Harford

Clearly, we'd like to thank you all for participating. We look forward to updating you in a few months time. Thank you.

Operator

Thank you for your participation in today's conference call. The call has concluded. You may go ahead and disconnect at this time.

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