Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Orbitz Worldwide (NYSE:OWW)

Q2 2013 Earnings Call

August 08, 2013 10:00 am ET

Executives

Brian Wolf

Barney Harford - Chief Executive Officer, President and Director

Michael O. Randolfi - Chief Financial Officer

Analysts

Naved Khan - Cantor Fitzgerald & Co., Research Division

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

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

Kevin Potterton - RBC Capital Markets, LLC, Research Division

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

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

Brian Patrick Fitzgerald - Jefferies LLC, Research Division

Operator

Welcome, and thank you for standing by. [Operator Instructions]

Now I'll turn the meeting over to your host, Mr. Brian Wolf, Senior Director, Investor Relations. Sir, you may begin.

Brian Wolf

Thank you. Good morning, everyone, and thank you for joining us on the Orbitz Worldwide Second 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 second 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 filing. These risks and uncertainties may cause our actual resorts -- 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 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 most comparable.

I would now like to turn the call over to Barney Harford, CEO of Orbitz Worldwide.

Barney Harford

Thanks, Brian. We're announcing today strong results for Q2 2013 on both the top line and the bottom line. We grew revenue 12% year-on-year in the second quarter and delivered 33% adjusted EBITDA growth. We achieved continued acceleration in stayed hotel room night growth up 20% year-on-year in the quarter, a sequential acceleration of 6 percentage points from the 14% growth rate in Q1. The room night growth acceleration we've seen in 2013 has been driven by our consumer brands Orbitz, ebookers and HotelClub. We've continued to benefit from the investments we've made in our global platform. Our efforts in advanced analytics, landing page optimization and CRM continue to drive growth in particular in the SEM and e-mail channels.

During the quarter, we saw a continued increase in our revenue mix coming from standalone hotel and vacation packages, which together grew to represent 48% of total revenue for the trailing 12 months ended June 2013, up nearly 400 basis points from 44% for the trailing 12 months ended June 2012. As we've seen continued strength in our hotel business and as we've benefited from certain targeted cost reductions, we've taken the opportunity to reinvest in marketing to drive continued acceleration in hotel room night growth. Looking ahead into Q3, we continue to see strength in hotel room night growth with July stayed room nights up 22%.

Towards the end of the third quarter, we will be lapping the launch of our American Express partnership. It is a long-term partnership that has delivered good results in its first year and has significant potential going forward. We expect that there may be some impact to our stayed room night growth rate in the fourth quarter as we lap the launch. That having been said, we feel very good about the strength of the private label business and the great accelerating trajectory of our consumer brands.

One exciting opportunity in our private label pipeline that I'd like to highlight: We recently signed a term sheet with JTG, the second-largest off-line travel agency group in Australia and New Zealand relating to a long-term partnership to power the online travel site for its new brand, "helloworld." We expect this deal to begin delivering benefits from early 2014. We will be using the global platform to bring a world-class OTA offering, including cutting-edge mobile capabilities to the Australian and New Zealand marketplace in a highly cost-effective manner.

From a product and technology perspective, we continue to focus on 3 key areas: international, loyalty and mobile. First, international. We continue to see significant opportunity to increase our presence in fast-growing international markets. HotelClub has the most geographically extensible model of all of our brands and its performance continues to accelerate. Following the addition of currency support for Brazil, Russia and China that we talked about last quarter, HotelClub in this quarter added currency support for Indonesia, India, Saudi Arabia, the United Arab Emirates, Qatar, Israel, Turkey, Poland, Hungary, Ukraine, the Czech Republic, Mexico and Colombia. HotelClub now offers customers the ability to earn up to 7% back in member rewards when booking hotels in any of 15 languages and 35 currencies. We plan to continue to launch new currencies and languages throughout the remainder of the year, further expanding the addressable market for the HotelClub business. Second, mobile. 25% of Orbitz Worldwide hotel bookings and nearly 30% of Orbitz.com hotel bookings are now coming from mobile devices. We are investing heavily in mobile to take advantage of the massive dislocation represented by the migration of consumers from desktop to touch devices, and we have an industry-leading suite of apps. Certain use cases highlight the importance of mobile, particularly clearly. For example, over 50% of Orbitz.com same-day hotel bookings now come through mobile. Finally, loyalty. We are focused on enhancing the relationship we have with our customers, recognizing and rewarding them for their loyalty to the Orbitz brand. The Orbitz Rewards loyalty program currently in test phase is designed to align customer incentives with our strategic focus on hotel. We've created our own stored-value currency, Orbucks. Customers earn Orbucks when making bookings on Orbitz and can redeem Orbitz (sic) [Orbucks] against subsequent hotel purchases. The current test phase is allowing us to get valuable customer insights as we finalize the details of the program, which we expect to launch to all Orbitz.com customers later this year.

We're pleased with our progress in the second quarter. I'd like to thank the Orbitz Worldwide employees for their continued hard work and dedication.

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

Michael O. Randolfi

Thanks, Barney. Turning to our second quarter financial results. We delivered strong growth in both the top and bottom line for the quarter and exceeded the guidance range we provided on our last call. Net revenue grew 12% year-over-year to $226 million and adjusted EBITDA came in at $43 million, up 33% from the second quarter of last year. As we continue to see acceleration across our business, stayed room nights, including vacation packages, grew 20%, which drove our year-over-year revenue increase. Revenue per room night benefited from the addition of the American Express partnership, which has higher ADRs than our overall business. ADRs were up 10% year-over-year for the quarter with domestic ADRs up 12% and international ADRs up 6%. Excluding our private label distribution business, ADRs were up 6% year-over-year with domestic ADRs up 4% and international up 4% as well. Vacation package revenue was up 6% in the quarter.

Standalone air revenue was flat for the quarter, driven by a declining volume in the OTC channel as a result of higher fares, which was offset by the addition of the American Express airline servicing revenue stream. Cost of revenue as a percentage of revenue was 17.4%, down 21 basis points for the second quarter -- down 21 basis points from the second quarter of 2012. This leverage was driven by efficiencies at our customer service call centers for our consumer brands and lower levels of customer refunds and fraud. This was partially offset by the addition of American Express.

Marketing expense as a percentage of revenue was 35.7%, up 134 basis points from Q2 of last year. The deleverage we saw in the quarter was driven primarily by a mix shift towards businesses that have higher marketing expense as a percentage of revenue. SG&A expense as a percentage of revenue was down 280 basis points. This leverage was driven primarily by our efforts to streamline our cost base and achieve targeted cost reductions associated with our move to the global platform, partially offset by higher employee incentive compensation given the strong performance to date, stock-based compensation and lower capitalized wages and benefits.

Net income was $561,000 for the quarter. Our net income for the quarter includes an $18 million write-off of deferred financing fees in connection with the successful repricing of our term loans in May, which we will discuss shortly.

Turning to the balance sheet. We ended the quarter with $223 million of cash and cash equivalents, as well as $65 million available on our undrawn revolver. At the end of May, we successfully completed the repricing of our term loans, which reduced the interest rate on Tranche B by 250 basis points and Tranche C by 200 basis points, as well as reducing the LIBOR floor from 125 basis points to 100 basis points. Additionally, as part of the repricing, we shifted $50 million of maturities from Tranche B to Tranche C. With maturities of $100 million on Tranche B due in 2017 and $350 million on Tranche C in 2019, this provides financing stability for the foreseeable future.

Moving to guidance. For the third quarter, we expect the net revenue to come in between $214 million and $220 million and adjusted EBITDA to come in between $41 million and $45 million. For the year, we expect net revenue in the range of $840 million to $850 million and adjusted EBITDA growth between 8% and 10%. To provide some context around this financial outlook, as you think about our revenue growth in the back half of the year, it is important to note that we will begin lapping the launch of the American Express partnership towards the end of the third quarter. Also in the fourth quarter, as previously discussed, our guidance incorporates the contra revenue impact of the expected launch of the Orbitz Rewards loyalty program.

Turning to cost. In the third quarter, we will lap a $5 million insurance reimbursement we'll receive for legal costs related to hotel occupancy tax cases. Also as we indicated last quarter, as a result of challenging company performance in 2012, we made only nominal payments for that year -- only nominal bonus payments for that year. Given our current outlook for 2013, this would represent a year-over-year impact of over $10 million with a disproportionate amount of this impacting the fourth quarter of 2013 as compared to the fourth quarter of 2012. Notwithstanding the few items I just called out, we're feeling really good about the back half of the year and our full year projections.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our next question comes from Naved Khan.

Naved Khan - Cantor Fitzgerald & Co., Research Division

Just a couple. Can you talk about your experiences with the TripAdvisor Meta product, and how that's performing for you? And on its earnings call, Expedia talked about some increased TV advertising by some new entrants. Can you talk about what you're seeing here and there in that channel? And then I have a follow-up.

Barney Harford

Sure. So with regard to Meta, I think, we typically don't talk about individual channels, but I'll talk broadly about our kind of approach. Now our main focus at Orbitz is encouraging customers to visit the site directly, given that's so much more profitable than acquiring transactions from pay channels. So we've been particularly focused on enhancing the on-site consumer value prop through delivering unique value to customers through stuff like loyalty, exclusive deals, member specials, et cetera. The role -- So for us, the role of online marketing is to acquire customers, and our willingness to pay to acquire transactions through different channels takes into account the expected customer lifetime value we're going to get from customer relationships we expect to establish through those channels. And we do a lot of modeling, well, to make sure we understand the details of that. Through the investments we've made in advanced analytics and land page optimization, we're doing very well and have been growing the SEM channel quite substantially. With regard to Meta, we are taking tactical decisions at the brand level about whether it makes sense for us to participate in individual Meta players based on a bunch of different factors at the brand level. But in aggregate, I think we are very much choosing to emphasize the SEM channel because of the attractive customer lifetime value characteristics of that channel versus Meta. And as a result, Meta is becoming a somewhat smaller percentage of our overall traffic. With that, I'm going to say we feel very good about the overall growth rate we're seeing in the business and the trends, the transactions that come to us directly. With regard to your question on TV and off-line media, the majority of our spend is online. And while it's certainly a competitive industry in the U.S., it's been competitive for a while and we haven't seen any substantial change to that in the quarter and the trends remain good.

Naved Khan - Cantor Fitzgerald & Co., Research Division

Okay, great. And then can you talk specifically about Europe and how ebookers is performing for you?

Michael O. Randolfi

Sure. Just talking very generally with regards to our businesses, I would say the overall trends are fairly consistent in that we have seen strong growth really across all our businesses: Orbitz domestically, ebookers in Europe and HotelClub. We've had significant standalone room night growth. And while certainly the macroeconomic environment in Europe may be challenging from a business standpoint, we are still seeing good growth in our room nights in that region.

Operator

Our next question comes from Mr. Michael Purcell.

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

I wonder if we could just talk a little bit more about the hotel growth, 20% is extremely impressive. I wonder if you could just kind of help us think about it on a same-store basis. I mean, AmEx is obviously organic, but I'm wondering if you could help us on a same-store basis and perhaps a little bit color on the brands. And my other question for you is I know you've been doing such a much better job with your analytics and everything else you noted. Is there any way that you could help us think about how much of it is increase in traffic to your sites versus how much that you're just better converting the traffic to your sites?

Barney Harford

Sure, sure. So if you look at the acceleration that we've achieved from Q4 into Q1 and then from Q1 into Q2, that acceleration -- and then in Q4, our room night growth was 7% and obviously in Q2, it was -- in Q1, it was 14%, and then this quarter, it was 20%. That acceleration has been driven by our -- I think by the improvement and the turnaround within our consumer businesses. And in terms of -- I mean, we've seen strength in each of those businesses. HotelClub, as you know, had -- previously had a number of challenges, and we feel good about the turnaround that the team there has successfully executed, and we've rolled that business over on the global platform. And we've got a new team that has a new strategy, and we are being aggressive in terms of international expansion. So great accelerating trends there. But similarly, we've seen strong trends in terms of acceleration on standalone hotel in -- at ebookers and some really great progress within the U.S. brand, Orbitz.com. So all of that is same-store. So I -- hopefully, that's responsive to your question. With your second question here with -- yes, we've got a traffic versus conversion. I think that as we have deployed our advanced analytics capabilities and have been strategic about the allocation of our marketing investments, we've seen a greater shift in spend towards higher converting channels. As a result, we're basically turning off lower quality traffic. We're also seeing the impact of a substantial shift to mobile on Orbitz.com. As I mentioned, we're seeing almost 30% of our total standalone hotel bookings being generated through mobile. And so as a result of those -- at least the kind of -- with the channel optimization, we're seeing strong strengthening in conversion and that may be offset by trends in traffic.

Operator

Our next question comes from Mr. Dan Kurnos.

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

Barney, maybe you could give us -- from a high level, maybe some insight on the partner network pipeline that you're seeing, and what the addressable market is there. And then on the marketing side, you talked about reinvesting in the business. I think that's clear from your guidance. Maybe some more color on how much of the incremental marketing spend is to support the HotelClub sort of relaunch. And then longer term, how you think about the balance between leverage in marketing spend as hotel becomes an increasing part of your performance.

Barney Harford

Sure. So with regard to the partner network, we talked briefly in the script and there were some announcements a few weeks ago about one partner that, I think, is indicative of some of the opportunities we have ahead of us, JTG, which is the second-largest off-line travel group in Australia and New Zealand. As you know, we've invested significantly over the last 4, 5, 6 years in building the global platform and migrating all of the consumer businesses on Orbitz over to that global platform. Since we completed our migration, we've also invested into capabilities in particular our flex infrastructure, which allows for very modularized page creation, which allows us to really personalize and customize stuff on our global platform. What this means is we're now able to start to offer to private label partners around the world the ability to develop, customize, but highly compelling OTA offerings. While we are currently present in the United States and then 12 geographies in Europe from an OTA perspective, that is only a small percentage of the overall OTA market opportunity. And while there's obviously organic growth for our existing brands as an opportunity, that type of growth is always limited by marketing investment. You can't expand into every market at the same time. But the private label opportunity given this technology, we see is extremely scalable in a very cost-effective manner. And so the JTG partnership is an example of the type of partnership that we are extremely excited about where we look to partner with international players that have existing scales and customer relationships and with which we can partner to bring cutting-edge OTA offerings to the market. So that's an indication of the kind of stuff we're working on. We have a very strong private label team and around the world, and I think there's a lot of opportunity there. I'll turn to Mike for your other 2 questions.

Michael O. Randolfi

Sure. With regards to marketing and then how we think about that in context of our hotel business, one of the things I'd point out just for the second quarter, if you look at marketing and if we would adjust our mix, we actually had improvement in our leverage in the second quarter as compared to the prior quarter of last year. So I do think that is important to note. A couple of other thoughts along those lines. Obviously, as Barney mentioned, our goal is to continue to drive people to our sites directly because that's one of the most efficient things we could do. So when you look at things like our loyalty program, they're going to continue to drive things to our Orbitz site directly, which is one of our most efficient ways of ultimately converting our customers. The other thing is we do have -- we have made over the last several years the substantial investments in our data analytics team. And the way we think about this and the way we will think about it with regards to hotel is leveraging the information, the data that our data analytics team produces to really generate the maximum efficiency with regards to marketing and how we ultimately get customers and how we ultimately get them to convert. So that's how we're approaching it going forward.

Operator

Our next question comes from Mr. Mark Mahaney.

Kevin Potterton - RBC Capital Markets, LLC, Research Division

It's actually Kevin on for Mark. Obviously, impressive hotel room night growth this quarter. Just wondering if you saw any negative impact on that line from the earlier timing of Easter this year, and I guess if we would've seen even more acceleration without that.

Barney Harford

Our internal estimates suggest that Easter pulled ahead some bookings into Q1. But despite that, we still saw acceleration to Q2.

Operator

Our next question comes from Mr. Heath Terry.

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

Curious with the success that you're seeing with white -- with the white label partnerships like American Express, and you certainly seem to be making more out of this relationship than the previous partner. Whether or not you're starting to see -- as you look at your pipeline of white label -- potential white label relationships that you mentioned, whether or not you're starting to see more competition for these relationships whether it's from some of the other players like Expedia and Priceline or their units or whether potentially even from new entrants. And then to the extent that your -- that you saw the 130 basis points of marketing deleverage in the quarter, could you give us a sense of whether that is best viewed as higher per unit costs in that the your banner ads or keywords or whatever you were buying simply cost more or whether that was sort of a conscious decision to buying greater volume and accept sort of the lower ROI that would come with that?

Barney Harford

So the private label space, it's not one marketplace. There's more of a commoditized end. And then where it's -- and then there's the component of the business where there's kind of a full technology solution with the deeper levels of customization, integration that are offered to partners. That is, I think, the sweet spot of the business that we're going after. And the technology capabilities that we've developed have kind of really helped us to deliver gains that opportunity particularly well, and I think the global platform is a really exciting opportunity for us there going forward. So in that more customized end of the market, I actually think it's significantly less competitive because it's so hard to do the kind of stuff that we're doing. And just because of the way the platform works and the kind of scalability. The fact we built 1 platform and we built it so that it would work for all of our brands, it's much easier for us to work with a partner like JTG in "helloworld" to develop a branded offering for them than it might be if we built separate technology platforms for each individual brand. But at the same time, we can deliver them something which is really cutting-edge and takes advantage of all the great stuff we've got, be it mobile, be it CRM, be it trigger-based marketing, be it keyword optimized bidding engine, algorithmic stuff, all of the good stuff that we've built on the platform. With regard to marketing leverage and deleverage, I think the point that Mike was making before is that the deleverage that we saw in the quarter was driven by mix shift towards private label given the year-on-year impact of the expansion of the private label business. If you net that out and you look at the marketing leverage or deleverage of just the B2C business, we actually achieved leverage in the quarter as we achieved efficiencies in the way that we allocate marketing dollars and as we're able to again effectively manage our spend across different channels, while still achieving strong acceleration.

Operator

Our next question comes from Mr. Brian Nowak.

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

Just to go back to the 20% room night growth accelerating again really strong. Can you help us all better understand a little bit the private label, and how much that drove of the total 20% growth in 2Q? And then how big of a room night growth headwind should we think about in 4Q when we just start to lap AmEx? And I have one more follow-up.

Barney Harford

So I think, as we said before, the acceleration from 7% growth to 20% growth in Q4 -- in Q2 was driven by the consumer brands. So actually it was not driven by the private label business. I think as you think about American Express and the contribution to room night growth, I think in terms of mid-single digits, in terms of the contribution to room night growth from that business, we launched it towards the end of Q3 last year. But obviously with the book-to-stay impact, it was really so much more benefiting Q4 last year.

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

Okay, great. And then, Barney, you mentioned some of the strength you're seeing in July. Any further color or commentary around which regions of the globe you're seeing that in?

Barney Harford

I mean, we're generally seeing -- with regards to the various regions, we're seeing strength really in all our regions with all our brands. I mean, we're seeing it domestically with Orbitz. We're seeing it at ebookers. We're seeing it in HotelClub. So all of our brands, particularly on the standalone room nights, have been particularly strong. We do -- we have continued to see growth in the packaging business, although the level of growth in the packaging business has been at a slower pace than the standalone room nights. But really in all the regions, we're seeing growth.

Operator

Our next question comes from Mr. Brian Fitzgerald.

Brian Patrick Fitzgerald - Jefferies LLC, Research Division

You saw improved international revenue market both sequentially and year-over-year. What's driving that? Is the airline servicing revenue stream and private label helping out there?

Michael O. Randolfi

Yes. In terms of the international, in terms of the growth, it's disproportionately going to be our shift on the hotel side. The private label business is impacting to a greater degree the domestic revenue, but what we're seeing is a greater shift from air to hotel as a mix of our revenue, and that's what's driving our revenue growth on the international side.

Barney Harford

And that lines up with the strategic focus we've had that we've been talking to you for a while about on hotel. It's playing out, and the fact that HotelClub is 100% hotels. So the turnaround there is a significant contributor on that growth, that mix shift as well.

Operator

All right. As of this time, sir, we don't have any questions on the queue.

Barney Harford

Okay. Well, we appreciate everyone's time this morning, and we look forward to sitting back with you next quarter. Thanks again.

Operator

All right. That concludes today's conference. Thank you all for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Orbitz Worldwide Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts