Orbitz Worldwide Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 9.13 | About: Orbitz Worldwide, (OWW)

Orbitz Worldwide (NYSE:OWW)

Q1 2013 Earnings Call

May 09, 2013 10:00 am ET

Executives

Melissa Hayes

Barney Harford - Chief Executive Officer, President and Director

Michael O. Randolfi - Chief Financial Officer

Analysts

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

Naved Khan - Cantor Fitzgerald & Co., Research Division

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Operator

Good morning, and thank you for standing by. [Operator Instructions] I would now like to turn the call over to your conference host today, to Ms. Melissa Hayes, Finance Vice President. Ms. Hayes, you may begin.

Melissa Hayes

Thank you. Good morning, everyone, and thank you for joining us on the Orbitz Worldwide First Quarter 2013 Earnings Conference Call. I'm joined on this call by Barney Harford, CEO of Orbitz Worldwide; and Mike Randolfi, our CFO.

As many of you have seen, we filed a press release this morning detailing our first 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 off to a strong start in 2013. We are pleased to have Q1 performance in terms of our accelerating room night growth and growth in revenue and adjusted EBITDA. I want to thank our Orbitz worldwide employees for their hard work in helping to deliver these results.

Stayed room night growth continue to accelerate, up 14% year-on-year driven by strong performance across all of our businesses. While the American Express private label partnership contributed to our Q1 room night growth rate, the sequential acceleration came from our consumer brands Orbitz, ebookers and HotelClub, as we've benefited from the global platform technology investments we've made over the last few years. We're pleased with how investments made in advanced analytics, landing page optimization, and bidding infrastructure are successfully driving strong growth in particular in the SEM channels. We continue to be pleased with the trajectory of the hotel business for Orbitz.com. We're feeling great about the progress of the HotelClub turnaround and are seeing promising growth from this hotel only brand with a strong loyalty offering both on the Asia Pacific market based in Sydney. Ebookers delivered strong growth from both standalone hotel and vacation packages. And the non-AmEx part of our private label distribution business benefited from new partnership launches and growth in existing partnerships.

As we have seen strength in our hotel business, and as we've been successful with certain targeted cost reductions, we have been able to reinvest in marketing to drive continued acceleration in hotel room night growth. Initial Q2 trends show continued acceleration eased up within March this year versus April last year, distorting year-on-year growth rates from March and April individually. We're looking at March and April in aggregate stayed room nights were up 17% looking on a booked basis, a good leading indicator of future stayed room night growth, March and April room nights were up over 20%. On the product and technology side, we are prioritizing investments in 3 areas to drive continued acceleration in room night growth. First, mobile. We continue to invest heavily in mobile to gain disproportionate share of mobile travel search and transactions. We are generating approximately 1/4 of Orbitz.com, hotel reservations through mobile and it's still early days. We're also doing well internationally. Second, loyalty. We're focused on enhancing the relationship we have with our customers. Recognizing and awarding them for their loyalty to our brands. In Q1, we began the phased rollout of our Orbitz.com Rewards Loyalty program. The initial customer response has been positive. Third, international. We see significant opportunity to increase our presence in fast-growing international markets. HotelClub has the most geographically extensible model of all our brands and now that this business is operating well, we're adding additional currencies and languages to increase its addressable market. HotelClub recently added currency support for Brazil, Russia and China and we have more to come in this area.

With that, let me turn the call over to Mike Randolfi, our CFO.

Michael O. Randolfi

Thanks, Barney. Turning to the first quarter financial results, net revenue grew 7% year-over-year to $202.9 million and adjusted EBITDA came in at $21.6 million, up 5% from the first quarter last year. Both top and bottom line performance exceeded the guidance range we provided on our last call, driven by significantly stronger performance than we had expected in the last 6 weeks of the quarter. Standalone hotel revenue was up 27% in the quarter. Total room night growth was 14%, with standalone room night growth coming in ahead of this. Offset by lower room night growth publication packages.

As Barney mentioned, we saw strength in hotels across all of our businesses in the quarter. Revenue per room night increased due in part to the addition of the American Express given the higher average ADR associated with that channel. Global ADRs were up 8% in the quarter, with domestic ADRs up 10% and international ADRs up 4%. If you look at ADRs excluding our private label distribution business, ADRs were up 3% year-over-year with domestic ADRs up 3% and international up 2%. Vacation package revenue was up 5% year-over-year. Standalone hotel and vacation packages, in combination, grew to represent 47% of total revenue for the trailing 12 months ended March 31, 2013, up 288 basis points from 44% in the trailing 12 months ended March 31, 2012. Standalone air revenue was down 4% in the quarter, driven primarily by weakness in U.S. channels, channel volumes, as well as weakness in certain travel markets in Europe, which resulted in lower air volume. This was partially offset by the addition of the American Express airline servicing revenue stream. Advertising and media revenue was up 14%. The cost of revenue as a percentage of revenue was 20.4%, up 133 basis points from Q1 2012. This deleverage was due primarily to the addition of American Express and was partially offset by lower levels of fraud and refunds. As you may recall, the error components of the American Express partnership is priced in 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 36.9%, up 241 basis points from Q1 of last year. This deleverage was driven primarily by a mix shift towards businesses that have a higher marketing -- that have higher marketing as a percentage of revenue. As Barney mentioned earlier, we also chose to step up marketing in certain parts of our business. We expect to see the benefits from the stepped up investment in future quarters. We achieved SG&A expense leverage in the quarter. SG&A expense as a percent of revenue was down 138 basis points as we continue to realize the benefit of our initiative to streamline our cost base and achieve targeted cost reductions associated with our move to the global platform. This was partially offset by severance related costs.

We posted $146 million of net income for the quarter, driven primarily by the release of a deferred tax asset valuation allowance attributable to our domestic operations. This is a result of cumulative profitability in our domestic operations and the belief that the future performance will allow forward use of this portion of our deferred tax assets. Turning to the balance sheet. At quarter end, we had $220 million of cash and cash equivalents. In addition we currently have $65 million of additional liquidity available under our undrawn revolver. We successfully completed our debt refinancing in March replacing our existing term loan that was due to expire in July 2014. We are also in the process of transferring letters of credit from Travelport's facility to our own. We expect to have substantially eliminated our reliance on Travelport facility by the end of the second quarter.

Turning to guidance. We expect net revenue between $214 million and $220 million and adjusted EBITDA between $35 million and $39 million for the second quarter. For the full year of 2013, we expect net revenue to be up between 4% and 7%, and adjusted EBITDA to be up between 5% and 10%. To provide some context around this financial outlook, we expect growth in global hotel packaging to drive our revenue increase in the second quarter and for the full year. Note that our Q2 and full year guidance ranges would imply a midpoint of 4% for revenue growth and 5% for adjusted EBITDA growth in the second half of 2013. It is important to note that the comparisons are more challenging in the second half of the year. Let me draw your attention to 4 factors contributing to this. First, as you may recall, we received a $5 million insurance reimbursement in the third quarter of 2012 for legal cost related to hotel occupancy tax cases. As we mentioned, we exhausted our insurance coverage and we'll no longer receive these types of reimbursements. Second, toward the end of the third quarter 2013, we'll begin lapping the launch of the American Express partnership. Third, as we've discussed before, our guidance incorporates the contra revenue impact of the Orbitz Rewards Loyalty program. While we expect the loyalty program to be accretive over the longer term, we expect it will be a drag on both top and bottom line in 2013. Fourth, as a result of challenging company performance in 2012, we made only nominal bonus payments for that year. Given our current outlook for 2013, this would represent a year-over-year impact of approximately $10 million, nearly all of which will be felt in the second half of 2013.

Our guidance assumes foreign exchange rates as of April 30. With that, operator, we'd like to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question does come from Dan Kurnos.

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

Just a couple of quick ones here in terms of clarification. First, Barney, maybe would you be able to -- would you be willing to give us a little bit more color or clarity on exactly the ebookers and HotelClub performance from a room night perspective in the quarter and then the timing of the loyalty program rollout?

Barney Harford

We've made a decision. We're not going to break out room night growth rates on a brand by brand basis. But what I would point to is the fact that we saw acceleration and good growth across all of our businesses in the portfolio. So I think we're feeling great about the trends across the business including at ebookers and HotelClub. In terms of our loyalty program rollout, as we said, we started the rollout towards the back part of Q1 and we expect the program to be fully implemented at some stage in the second half of the year.

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

And then you gave us some pretty good color on your geographic opportunities, and you called out Brazil, Russia and China. I'm just wondering if there's any other specific areas that you're targeting from both -- well from either a hotel or vacation package perspective. And secondarily, how you're differentiating your product in those new markets?

Barney Harford

Yes. I was talking specifically about what we're doing with HotelClub where we have -- now that we have a model that we feel good about operating well, we are increasing the language and currency coverage for that business to increase the addressable market. We already have presence in 15 to 20 different languages and currencies. And so we have, I'd say, a significant strategic focus at HotelClub on the Asia-Pacific region and that continues. And I think we feel good about how that model can work. In terms of specifics about HotelClub, I think one of the things that's most important about HotelClub is the loyalty offering that we have there. It's actually similar to the program that we're rolling out at Orbitz. We've been running it for a number of years now. But customers who make reservations on HotelClub, their accounts are credited instantly with member rewards dollars, which they can then credit towards the value of a future hotel transaction. And the members get up to 7% value in terms of hotel rewards. And we're finding that program to be extremely successful. In terms of international growth, we also see opportunity to take advantage of our private label model to drive international expansion in building on the capabilities and investments we've made in the global platform. Clearly, our global platform, currently on the OTA side is currently deployed against North America and Western European opportunities. But there's no reason why that platform shouldn't be effective in other parts of the world as well.

Operator

Our next question comes from Naved Khan.

Naved Khan - Cantor Fitzgerald & Co., Research Division

Just a couple. Just in mobile, can you talk about how big mobile is today especially in terms of business or maybe just in terms of driving traffic and what are some of the things you're doing to sort of improve conversion rates? And also if all your brands are sort of on an equal footing, as far as mobile goes, are you ahead on some brands and other brands need to catch-up? And then I have a follow-up.

Barney Harford

Sure. So -- mobile has been great for us. When we think about the mobile part of our business, we are seeing around 1/4 of hotel reservations to orbitz.com going through mobile channels. Just to make sure we're clear, when we talk about mobile, we're talking about smartphones and tablets both across native apps and across web experience, be it mobile web or tablet web.

We are seeing -- I'd say the Orbitz.com penetration in the U.S. is slightly ahead of the penetration that we're seeing or the kind of mix of our business, but we're still seeing a strong percentage of our ebookers and HotelClub businesses that are being generated through mobile. We recently rolled out the ebookers universal app, that's an app that works -- offers air, car, hotel search and booking capabilities across iPhone and iPad, we recently rolled that out to ebookers and have been -- gave us some really good success in terms of driving awareness, downloads and position in the iTunes Store.

In terms of what we're doing to drive conversion, we have a significant focus on driving conversion across various different experiences. But I'd say particular focus right now on what we're doing on the tablet where we see substantial growth in usage and significant opportunity for us to go and really align that experience with touch-optimized requirements.

Yes. And you've got a follow-up?

Naved Khan - Cantor Fitzgerald & Co., Research Division

Yes, that's helpful. And then -- so just on the efficiency of your online marketing spend, how much of the deleverage is because of the mix shift that you might be getting more business out of Asia Pac where maybe you don't have as much efficiency and how much of that is really sort of deflationary or really you sort of opting to drive it?

Michael O. Randolfi

I would say there's a couple of things on the percentage of marketing spend. One, we've had a shift to some parts of ours business that have a higher percentage of marketing as a percentage of revenue, and that's having an impact. And then in various parts of our business, we have made a very specific decision to step up marketing proactively to drive profitable growth within the business. So that's happening in various businesses, but I don't think we've touched on which businesses individually. But throughout our businesses we are -- we have stepped up marketing opportunistically.

Michael O. Randolfi

But I would -- in terms of -- just a couple of follow-ups on that. The mix shift -- one of the things -- for example -- we've seen strong growth within HotelClub and in our private label business and those are channels that have a -- where marketing is a higher percent revenue than, say, our U.S. Consumer business which is more mature. So you're correct, that's one of the drivers. When it comes to -- within individual businesses, a lot of what we're seeing is really being driven by the really effective work we're doing in terms of marketing optimization where CPC trends that we see in the business, are really much more driven by our selection of keywords we're buying and driven by our analytics than broad market trends.

Operator

Our next question does come from Heath Terry.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

I was wondering if you could give us a sense of what room night and bookings growth would look like x the AmEx relationship? I understand you probably can't break out specific numbers, but just given on a relative basis, if you can kind of help us get to more of an organic number for the core business that would be really helpful. And then clearly, AmEx doesn't seem to be having or this sort of larger relationship doesn't seem to be having any negative impact on booking margin or your overall margins. Is the white label opportunity something you feel like can be a more significant growth driver for the business going forward? Are there are other opportunities like AmEx or other wins like AmEx that are out there for you?

Barney Harford

Sure. So I think we pointed in the script to the fact that the acceleration in room night growth was driven by acceleration in our consumer branded businesses. So if you remember in Q4, we reported 7% room night growth and we're reporting today 14% room night growth for Q1. And so the acceleration there from 7% to 14% was driven by acceleration within the branded businesses. I'd also say that the majority of the growth that we're reporting today is driven by growth in business lines other than the American Express partnership. That being said, the American Express is certainly a significant contributor to growth right now.

More broadly in terms of white label, we think there's a lot of opportunity. This is an immense market. It is significantly underpenetrated. There are a small number of players with the capabilities to drive and deliver the types of experiences the consumers want. And that having been said, there's a lot of participants in the travel market place who are interested in having cutting-edge solutions. And I think that's something that's been extremely successful as this business has built within Orbitz Worldwide over the course of last 3 or 4 years. And we absolutely expect us to continue see strong growth in that business.

Operator

[Operator Instructions]

At this time, I show no questions.

Melissa Hayes

Any closing remarks, Barney?

Barney Harford

Yes, absolutely. Well, I really appreciate everyone participating in the call today. We look forward to talking to you again in the next quarter. Thank you.

Operator

Thank you. Today's conference has ended. All participants may disconnect at this time.

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