Orbitz Worldwide's (OWW) CEO Barney Harford on Q1 2014 Results - Earnings Call Transcript

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 |  About: Orbitz Worldwide, Inc. (OWW)
by: SA Transcripts

Orbitz Worldwide, Inc. (NYSE:OWW)

Q1 2014 Results Earnings Conference Call

May 05, 2014 10:00 AM ET

Executives

Brian Wolf - Investor Relations

Barney Harford - Chief Executive Officer

Mike Randolfi - Chief Financial Officer

Analysts

Naved Khan - Cantor Fitzgerald

Brian Fitzgerald - Jefferies

Mark Mahaney - RBC

Dan Kurnos - The Benchmark

Heath Terry - Goldman Sachs

Kevin Kopelman - Cowen & Company

Edward Woo - Ascendiant Capital

Operator

Welcome, and thank you for standing by. At this time all participants have been placed on a listen-only mode until today’s question-and-answer session. I would now turn the call over to Mr. Brian Wolf. Sir, you may begin.

Brian Wolf

Thank you. Good morning, everyone, and thank you for joining us on the Orbitz Worldwide First Quarter 2014 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 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 Brian. We delivered a strong start of 2014 with adjusted EBITDA growth of $0.33 year-on-year to $ 28.7 million; room night growth of 12% and net revenue growth of 4%. We made great progress during the quarter towards the development of a meaningfully differentiated consumer value proposition for our brands through our loyalty offerings. And we enhanced the strategic position of our private label over the partner network to the acquisition of Travelocity Partner Network or TPN.

In my prepared remarks, I'll talk about our progress against our three strategic initiatives royalty, mobile and international expansion and I'll cover TPN. Royalty, we launched the Orbitz Rewards loyalty program in October of last year and we already have almost 2 million members. Through the program members earned Orbucks, when they book hotel rooms, flights and packages on Orbitz.com. Members can then instantly redeem those Orbucks against future hotel bookings.

Our Orbitz Worldwide and our investors the program is all about incrementality. For having incremental hotel transactions and thus incremental margin that more than offsets the counter revenue impact with the Orbucks with our crude as members earn them.

Three early indicators that the program is driving incremental hotel transaction. First, new customers approximately half of the customers joining Orbitz Rewards are new to the Orbitz.com brand. Second new hotel bookers, a large percentage of a customer’s redeeming Orbucks have never booked hotel with us before. Third [air] hotel attach we’ve seen a meaningful increase in the overall hotel to air attach rate since we launched Orbitz Rewards.

Program also works to encourage usage of our industry leading mobile apps even higher levels of earn for bookings via the app. Fundamentally, these factors are all working to bend the curve in terms of customer lifetime value allowing us to claim an increased share of our customers’ wallet in a way that it’s win-win for both Orbitz Worldwide and our customers.

Complement the Orbitz Rewards loyalty program; two weeks ago we launched the Orbitz Rewards Visa Card, which allows card holders to earn an additional 5% in Orbucks when purchasing travel on Orbitz.com in addition to Orbucks earned through the Orbitz Rewards royalty program, all other purchases on the card then 2% in Orbucks. Card holders also become star level members of Orbitz Rewards given the benefits including hotel upgrades, complementing hotel amenities and the priority customers services number.

Developing this really strong consumer value proposition we selected a card issuer partner willing to use the card issuer interchange fee generated from overall card usage to fund these compelling Orbucks earned benefits which we expect to try further increment hotel bookings as customers redeem their accumulated Orbucks.

Turning to mobile. We continue to see strong trends in mobile adoption as we rolled our new capabilities and as we continue to use the royalty program to drive mobile app usage. We’ve launched Facebook and Google Plus Social Sign-in, Google Wallet, PayPal and safe traveler profile on our mobile apps, further reducing friction in our integrated [search] to book experience. Across all of our B2C brands, 30% of standalone hotel booking in the first quarter made using mobile devices up from 22% in the year ago quarter.

International expansion: Internationally, we continued to see strong growth in hotel room nights from our ebookers and HotelClub brands. We continued to invest in products and localization to drive our international business. Efforts around localization include the design and implementation of content, product features, interfaces and services that are relevant for specific markets. These efforts are proving to be successful in driving conversion improvements and overall bookings growth. So the benefits of these efforts in Asia in particular where booked room nights were up 38% year-on-year.

On our last call, I mentioned the launch of HotelClub’s Chinese brand HotelClub Hàokèbāng. We recently hired a VP and General Manager for China who brings deep knowledge of both e-commerce and the region to the team. She will lead our China expansion efforts and be directing a dedicated development team working on China specific localization. Our presence in China is growing and initial signs are promising. As a reminder, our initial focus in China will be on the outbound market as opposed to domestic market.

We also have significant international growth opportunities with our B2B businesses. We announced today in our earnings release that Orbitz for Business has signed an agreement with IBM, one of the world’s largest corporate travel consumers to provide the online booking technology for the company’s business travel program through 2020. Orbitz for Business will support IBM in 90 countries around the world.

Travelocity Partner Network: We announced during the quarter that we had acquired certain assets and contracts of the Travelocity Partner Network or TPN. TPN provides private label technology solutions for bank loyalty programs, facilitating the redemption of loyalty points to travel by bankcard customers.

TPN brings us significant technology capability and strong customer base in the bank loyalty market. TPN also brings rich, self service configuration tools to smaller partners. The acquisition of TPN makes us a leader in the U.S. bank loyalty segment and positions us well for further growth in this area, both domestically and internationally.

To conclude, we are fired up about substantial growth opportunities ahead of us. We’ve developed a highly differentiated consumer value proposition with Orbitz Rewards. We’re already seeing it drive incremental hotel transactions. We just launched Travelocity's most rewarding credit card, and we're just getting started.

Now over to Mike Randolfi.

Mike Randolfi

Thanks Barney. Turning to our first quarter financial results, we continued to build on our 2013 success with strong adjusted EBITDA growth and strong free cash flow generation and closing of the TPN acquisition and the refinancing of our term loans which allowed us to garner a lower interest rate and the longer maturity.

Net revenue grew to $210 million or 4% year-over-year, of which approximately 2 percentage points of growth came from TPN.

Adjusted EBITDA came in at $28.7 million, up 33% from the first quarter of last year and above our guidance range. Adjusted EBITDA performance was better than expected due to a few factors. First, we received certain airline override payments in the first quarter of this year, which we have historically received in the second quarter. Next, we saw a slower than expected decline in bookings from KAYAK during the first quarter following the expiration of our exclusive relationship with them at the end of 2013. And finally, we some favorability in operating expenses in the quarter due to a slower than expected hiring ramp as we stepped up our planned product investment.

TPN did not have a meaningful impact on our first quarter adjusted EBITDA results. Our business continues to generate significant free cash flow defined as operating cash flow less CapEx on a trailing 12-month basis; Orbitz generated $95 million of free cash flow.

Standalone hotel revenue was up 7% year-over-year. Stayed room nights, which include room nights sold as part of our vacation package, grew 12% year-over-year. With regards to some specific impacts, the timing of the Easter Holiday in Q1 2014 as compared to Q1 2013 reduced our Q1 2014 year-over-year growth rate, but that impact is approximately offset by the additional room nights from TPN.

Standalone hotel revenue growth was driven by room night growth and ADR expansion, partially offset by an increase in the contra revenue associated with the ramp of the loyalty program and promotional activities.

It’s worth calling out that Q1 2014 standalone hotel revenue growth was lower than hotel room night growth in contrast to full-year 2013 standalone hotel revenue growth which was higher than hotel room night growth. This was driven by the ramp up of the American Express business during 2013, which had significantly higher ADRs versus the rest of our business.

Standalone air revenue was up 1% versus the prior year. TPN contributed approximately 4 percentage points to the standalone air revenue growth in the quarter. Excluding TPN, the lower year-over-year standalone air revenue was due to lower air volumes as a result of the expiration of an exclusive relationship with KAYAK offset by higher net revenue per transaction as a result of both the timing of certain airline override payments that I mentioned earlier and the growth in air servicing revenue for the American Express private label business.

Vacation package revenue was up 4% in the quarter and advertising and media net revenue grew 12%. Cost of revenue, as a percentage of revenue, was flat compared with the first quarter of 2013. Excluding the acquisition of TPN, cost of revenue was down 64 basis points as efficiencies at our customer service call centers were partially offset by costs associated with higher global hotel volume. TPN’s private label business incurs higher customer service costs as a percentage of revenue as compared to the rest of Orbitz Worldwide.

Marketing expense as a percentage of revenue decreased 42 basis points from the first quarter of 2013. This decline was significantly impacted by the airline override payment timing which drove higher than expected revenue in the quarter.

SG&A as a percentage of net revenue for the first quarter of 2014 decreased 417 basis points. This SG&A leverage was particularly large due to the fact that in the comparable period of 2013 we had incurred severance costs in connection with the targeted cost reductions the company took in the first quarter of 2013. Excluding the year-over-year impact of these severance costs, SG&A as a percentage of net revenue decreased 248 basis points in the first quarter of 2014.

Net interest expense remained flat at $9.6 million for the first quarter 2014 compared with the first quarter 2013. The weighted average interest rate in the first quarter of 2014 was 5.5% compared with 3.6% in the first quarter of 2013, reflecting the financing agreement that was put in place when the company went public in 2007 at the then prevailing interest rates.

This increase resulted in an increase in interest expense of $2 million offset by lower letter of credit fees of $1.4 million and lower amortization of deferred financing fees of $1 million.

In April we refinanced our $440 million term loan with a new $450 million term loan maturing in April of 2021. In addition to extending the maturity of our debt the new term loan carries an interest rate that is approximately one percentage point lower than the rate we’re paying on our previous term loans. As part of the refinancing we secured an $80 million revolving credit facility that matures in April 2019, replacing our $65 million revolving credit facility which was set to mature in March of 2017.

We ended the quarter with $315 million of liquidity which was comprised of $250 million of unrestricted cash and cash equivalents as well as $65 million available on our prior undrawn revolver. Again our new revolver as $80 million which is fully undrawn.

Moving to guidance, for the second quarter we expect revenue between $239 million and $245 million and adjusted EBITDA between $42 million and $47 million. For the full year of 2014 we expect net revenue will grow in the high single-digits. We are reiterating our adjusted EBITDA guidance of high single digit growth for the full year. I do want to take a moment to highlight a few items around our revenue and adjusted EBITDA expectations for the remainder of the year. First revenue, the increase to our full year revenue guidance reflects the impact of the TPN acquisition.

As we have indicated on our prior calls, as the Orbitz Rewards loyalty program ramps up, it is reducing hotel take rate invest, modestly reducing the hotel revenue growth rate as compared with the room night growth rate, due to counter revenue recorded as customers earned Orbucks.

Based on never behaved or already observing we expect Orbitz Rewards to have a positive impact on our revenue and room night growth rates as Orbucks redemptions drive incremental hotel transactions. Based on book trends today, we expect Q2 stayed room nights to accelerate to the high-teens when TPN contributing approximately 1/3 of that growth.

We expect air revenue per transaction and the second quarter to be down year-over-year due to the impact of the loyalty program, changes in supplier agreements and [all] having received certain air line over right payments in Q1 rather than Q2. We expect revenue growth to accelerate in the back half of 2014 as we realized benefits from our loyalty program from the air initiatives that we talked about last quarter and from TPN.

Now adjusted EBITDA as we look forward to the balance of the year, we plan to take advantage of adjusted EBITDA outperformance to make investments for the long run in loyalty, product and marketing while remaining on track to deliver full year adjusted EBITDA guidance that we communicated this quarter and last.

With regards to TPN, we do not expect it to have a material impact on adjusted EBITDA in 2014. But as we integrate the TPN business within the next 18 months to 24 months, we expect that it will contribute positively to adjusted EBITDA. As you think about the second half of 2014 in the quarterly adjusted EBITDA trend as compared to the prior year, we remind you that in Q4 of 2013, our performance based bonus expense was significantly higher than in other quarters in 2013. As a result, we expect to see stronger year-over-year adjusted EBITDA performance in the fourth quarter versus the third quarter.

Finally, on CapEx we expect that spend will be a little higher than we have indicated on our last call more in a $47 million to $53 million range, due primarily to integration work associated with the acquisition of TPN.

In summary, we're feeling very positive about our business trajectory, Q1 was a strong quarter and we have a good trajectory for the balance of the year.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Naved Khan with Cantor Fitzgerald. Your line is open.

Naved Khan - Cantor Fitzgerald

Yes. Hi, thanks for taking the question. Just a couple. If I look in the marketing line for the first quarter, it seems like it didn't really show much of leverage. Can you speak to that, with reference to the Orbucks, and how that actually -- at least acts up to that and to show some positive [zone] in terms of marketing spending and how do you expect this trend going forward?

Mike Randolfi

Well, if you look at the marketing line, there is a little bit of leverage in the marketing line. I think it’s about 42 basis points of leverage, but the way I would think about loyalty is we are still in the early phase of our Orbitz Rewards program. And you still have a lot of customers at this stage that are building balances and looking forward to future redemptions. So, I think it’s too early to discern a trend on marketing from Orbucks and Orbitz Rewards, but overall we did see a little bit of leverage in that line.

Naved Khan - Cantor Fitzgerald

Okay. So it is then fair to assume that maybe in the second half you will have more of an impact from Orbucks on this line versus in the first half?

Mike Randolfi

Yes. I think I would think of marketing a little bit differently, because I think the way we view it as to the extent we identify certain more efficient ways to drive customer acquisitions and individuals coming to our sites and generating transactions, and we are going to continue to look at what’s the next incremental opportunity, and so I think it’s going to depend overtime.

Naved Khan - Cantor Fitzgerald

Okay. And then just on the TPN, I mean I get it that at least in the near-term you don’t expect much of a contribution on EBITDA, but over the longer term, do you expect this business to have margins that are similar to the core or how should we think about it?

Mike Randolfi

Yes. I mean the way I would think about it is as we had indicated in the -- this year, we don’t expect it to have a material impact on EBITDA. When you look out once we are past integration, we do think they will contribute to EBITDA.

Barney Harford

And we haven't provided the guidance beyond 2014, but we do think that this is a business which will generate EBITDA.

Naved Khan - Cantor Fitzgerald

And you do look on this as a growth business?

Mike Randolfi

I mean, I think the way we look at it is, this gives us tremendous amount of capabilities in the private label space and that coupled with the strength we've developed already as we've indicated with things like AMEX and a lot of the other businesses, the private label business collectively, really gives us the ability to grow and develop that business overtime. So we think it is a good opportunity for growth over the longer term.

Barney Harford

Just to be very specific, we think the substantial growth opportunities in particular in the bank loyalty market, both domestically and internationally. TPN has relationships with three of the large banking institutions in North America, and we think this is opportunity to increase the number of significant relationships in North America. We also think there is opportunity to develop this business internationally.

Naved Khan - Cantor Fitzgerald

Got it, okay. And the last question for me. Barney, as you look at the travel conditions today, how would you compare those versus maybe three months ago, I mean back in February when you gave guidance for the full year?

Barney Harford

I think we see a favorable travel market, but I don't think -- there is no major change in the overall market condition that are factored into our guidance. But just to be honest, we are less focused on the macro and more focused on company specific factors.

Naved Khan - Cantor Fitzgerald

Thank you, guys.

Barney Harford

Next question?

Operator

Thank you. Our next question comes from Brian Fitzgerald with Jefferies. Your line is open.

Brian Fitzgerald - Jefferies

Thanks guys. Can you remind us the cadence or how the AMEX] ramp progressed last year? Was it pretty gradual, when should we anniversary that? And then along the similar vein, as you think about TPN and Visa and Orbitz Rewards, those are all growing initiatives, should they ramp at the same cadence throughout 2014? Last question is, was the recent Visa deal, was that predicated on your exposure, your partnership with TPN? Thanks.

Barney Harford

There is a couple of different pieces there with regards to AMEX, and I would just say, probably the most summary way to say it is we have ramped and a lot ramping of American Express at this stage. So that business, there is ramp of the business. We still think over time this is providing good opportunities for us but we ramp the impact of that, that being part of our business. With regards to TPN, the way I would think about that is you have a partial quarter impact this year, I mean this quarter, and when you move into the second quarter, you’re essentially going to have a full quarter impact. So, I think that’s the way I would think about TPN. And that’s incorporated in our revenue guidance and is incorporated in the room night color that we provided for the second quarter.

Brian Fitzgerald - Jefferies

Royalty ramp.

Barney Harford

Yes. And with regards to loyalty, the way I would think about loyalty and this is incorporated in our guidance, is in the beginning of the program, in the earlier part of the program which we’re still in and we see great indicators of consumer behavior. You have a period where individuals are earning rewards; we’re booking accounts for revenue. and then over time what we will see is and what we are seeing based on the indicators is that those same individuals then start to redeem room nights. And it’s really a -- what we are seeing is a nice degree of incrementality in room nights that we are capturing that we wouldn’t have been able to capture without the program. We think that is going to continue to build and continue to build throughout the year as we end this year and move into next year, we think that is going to continue to generate a nice opportunity for us.

Mike Randolfi

And thin with regard to the Orbitz Rewards, Visa Card and when that is predicated or connected with TPN, no that’s completely sepearte. And while on the TPN business we are serving the needs of how issue is to help them with their loyalty programs and program that we developed, the Orbucks program we developed has been developed separately. We are working with Alliance Data Systems as our card issuing partner and it is completely separate.

Barney Harford

A great tie-in to our loyalty program obviously though.

Brian Fitzgerald - Jefferies

Great, thanks, guys.

Operator

Thank you. Our next question comes from Mark Mahaney with RBC. Your line is open.

Mark Mahaney - RBC

Thank you. One quick question on TPN. That would just impact domestic bookings and revenue results; there would be very low international impact or none at all?

Barney Harford

That is correct.

Mark Mahaney - RBC

And then bigger picture, could you talk Barney about, again this is some quarter before, but I will ask it again, of the alternative accommodations as an area of growth for the industry and for Orbitz, how do you think about that market and how high or low of a priority is it for the company?

Barney Harford

I mean, I just wonder we continue to look at it, we are having a number of discussions with parties about how we might play in that space. But I would say it is lower on our priority list than number of kind of key initiatives that we have been talking about on this call and over the last couple of calls. So, definitely something that we are interested in, but it's not top of the list in the future.

Mark Mahaney - RBC

And then you talked a lot earlier in the call about mobile as an increasingly material channel. Could you talk about -- and in past, I think you said 30%, I think that was bookings; and mobile, I assume it would be roughly 50-50 within mobile that would be tablets and smartphones. But could you talk about mobile as how efficient that channel is, do you find that conversion rates are rising now between say smartphones and desktops, is it 30% of bookings, but 50% of leads or traffic to the site and therefore that's how you think about it gapping up in the future? Anything you could -- what I’m trying to get at is the [efficiency of mobile], it's obviously material as a bookings app, but as a marketing channel to get bookings, is it still materially less efficient than desktop?

Barney Harford

So, it is the metric, the 30% metric that we referenced relates to standalone hotel bookings that are made across all of our sites around the world, if you think of ebookers, et cetera. And the mix between apps and mobile web and tablet web is moving increasingly towards apps, although mobile web, tablet web is still quite significant. I think we -- as you said before, on the smartphone side, we see a greater orientation towards same day bookings.

So, if you look at our total business, we do around 20% of our bookings same day. But if you look at the essentially those same day bookings that are done through mobile device is 60%. So that is again pretty similar to our (inaudible) 12 percentage points. So it’s a little bit less than half of what we are seeing through mobile devices is same day bookings.

I think what we see in particular through the app is extremely high levels of conversion which reflects the greater level of consumer engagement amongst those who have downloaded the app. And that is the reason why we are so focused on engaging with our customers with giving them opportunity to experience the app experience which we think is the easiest, most fun way to enjoy Orbitz -- our brands around the world. That’s one of the reasons why when you look at the Orbitz Rewards program, we have increased the earn levels for transactions that are consummated through the app. So you earn 1% in Orbucks when you book, now I think on the desktop, 2% when you book it through the mobile app a or hotel and you earn 3% on a desktop, 5% when you book through the mobile app. Hopefully that provided some extra color there.

And one other point I would say about mobile is we’re particularly excited about the way that we’ve been able to use the mobile channel to enhance the competitiveness of differentiation of the inventory offering that we have. So we now have Mobile Steals, so mobile exclusive discounted rates in over 500 markets globally as we use mobile as a way to give suppliers -- an effective way to fence off and sell distressed inventory without broadly impacting ADRs.

Mark Mahaney - RBC

And one last quick question. Did you make any general comments, you don’t really make any general comments on the effectiveness, relative efficiency of Google and Facebook advertising as a marketing channel for you; I only ask because I think one of the exacts of one of your competitors [popped out at inter] quarter. Any comments you want to make on the effectiveness of base. I know you mentioned Facebook earlier, but as a marketing channel comparison with some of the other more traditional direct marketing channels like Google? Thanks.

Barney Harford

I don’t comment (inaudible), I’m not going to comment on that. We -- I don’t want to get in the middle of those guys. But in general, we don’t get into the relative efficiency that they can challenge. But we’re definitely engaged in exploring ways to take advantage of the reach and the opportunities across Google obviously, but also Facebook and Twitter as they develop variety of different offerings.

Mark Mahaney - RBC

Thanks a lot Barney.

Barney Harford

Thank you.

Operator

Thank you. Our next question comes from Dan Kurnos with The Benchmark. Your line is open.

Dan Kurnos - The Benchmark

Yes, great. Thanks, good morning. Just quickly Barney, a good color on China in particular just curious may be digging a little bit deeper on sort of the pace at which you expect to rollout supply in that market and also any thoughts on ancillary markets around there? And then separately, given the enhanced liquidity position that you have now just thoughts on use of cash? Thanks.

Barney Harford

So, with regard to China, we’re in still pretty early days here. This is not the first time I’ve looked at building businesses in China given I was involved in [spruce] entry into China with eLong and I was on the Board not until for a number of years. So, we have experience in China. That’s significantly been increased by departments of Dandan Cheng we just put out that announcement today after (inaudible) business based on Shanghai.

The initial focus in China is going to be on the outbound market as opposed to the domestic market. As you think in terms of key markets, the greatest opportunity is going to be in the kind of the Southeast Asia region. But in general, we’re looking to build out supply into kind of key destination for China’s consumer so you can think in terms of Hong Kong, Thailand, Australia, Europe and the United States I guess as a number of key markets there.

We expect to be actively involve and trying to find ways to facilitate independent travel among the Chinese consumers. This is a very significantly growing segment of the Chinese market, historically China’s consumers have tended to travel more in groups as a number of Visa-related issues that have amended that’s been a greater part of the mix both with changes in regulations and also with increasing experience most Chinese consumers are traveling internationally.

We think that this market segment is right for us to bring the HotelClub, membership club offering and the HotelClub is not just about transactions, it’s about the broader center of club benefits the members have. And we think that it is going to be very compelling to the Chinese market. So we’re excited. It’s still early days, but it’s interesting, it’s a great start. And Michael do you…

Mike Randolfi

Sure. So, a couple of thoughts with regards to cash. First, I’ll just remind you that our cash balance tends to be fairly seasonal in nature throughout the year. So, it tends to gets you higher levels of cash balances in the spring and summer months and then it comes down to a lower level at the end of the year. So, just to remind you that the levels we’re seeing in this quarter and next quarter will be the peaks for the year. And then as you get to the back part of the year, we would expect it to come down somewhat.

The way we think about cash, we generally think about cash as an offset to working capital and merchant payables. So, I would say for the foreseeable future we are comfortable letting our cash balance increase. So that’s our general strategy. What I would also say is to the extent that overtime we identify opportunities that are accretive to our company and our strategy, we like the flexibility that the strong cash balance provides for us.

Dan Kurnos - The Benchmark

So just to follow-up on that Mike, I guess looking at your -- you still are pretty free cash flow positive here, you are going to continued to build throughout the balance for the year even with the expanded CapEx guidance you’ve given and understanding that cash is seasonally high now plus enhanced flexibility you’ve got with the new debt, look you need the TPN acquisition, I’m just curious if we should think that you might be looking to make more tuck-ins this year if it’s really just we’ve got a lot on our plate right now and we want to build organically and then maybe in ‘15 we start getting a little bit more aggressive on buying either [tack] or growth?

Mike Randolfi

Yes. I would want to comment specifically on that. What I would say in general though is we like the flexibility that nice cash balance provides us. But beyond that, I wouldn’t want to provide additional context.

Dan Kurnos - The Benchmark

Okay. Fair enough. Thanks guys.

Operator

Thank you. Our next question comes from Heath Terry with Goldman Sachs. Your line is open.

Heath Terry - Goldman Sachs

Great. Barney, I was curious if you could just give us a little bit more detail on the IBM relationship. Was that necessarily signals about your interest in the corporate market and how you’re thinking about Orbitz to some offerings stacking up or at least developing that offering relative to more traditional corporate solutions customer providers that are out there?

Barney Harford

Well, the co-business of Orbitz business has been the provision of the end-to-end booking experience where we manage both the online booking technology and also customer service fulfillment. In the case of IBM, we are going to be providing the online booking capabilities for IBM. They have existing partnership with one of the major global TMCs on the customer service and fulfillment side.

So, I think this is a -- this new relationship that we’re announcing you can -- you should understand from this a couple of things. One is our intention to expand the OSP business internationally. And secondly, our interest in pursuing opportunities to provide the OSP business technology to the other companies of TMCs on online booking engine bases to the extent that that make sense to those particular market opportunities that we have both of those offering, the full service offering and the online booking engine offering.

And I think fundamentally, this lines up the reason why partners are really interested by what we have to offer with those businesses, because the consumerized corporate experience that we’ve been able to achieve, we are able to deliver online booking experience to global traveler that mirrors the tools they choose to use as a leisure traveler on Orbitz.com. We’ve been able to take all of our experience in making the site easy to use for consumers and leverage that to provide a very easy to use experience solution at the corporate travel level while also incorporating all of the corporate travel requirements around compliance and negotiated rates et cetera. It’s for these reasons we are able to achieve levels of online adoption of 90% or greater our planned levels of business versus levels of online adoption more in the 60% range that are seen by the primary online booking tools that are used by the traditional TMCs. And that’s -- I think that’s the reason why many, many customers are setting to the other key solution.

Heath Terry - Goldman Sachs

And do you anticipate this or is this is an area of significant incremental focus for you and your team in terms of what you are going to be trying to push to grow Orbitz overall, more so than you have in the past?

Barney Harford

Orbitz for Business has been a key part of the business for many years now. But I think the international expansion opportunity that we see for Orbitz for Business is one that we are very excited by and we also think it would be the opportunity to turbo-charge growth by deploying the online booking engine on a [capital] basis from the end to end experience is also I think attractive. So this line is out with the progress that we’ve made building out with global technology platform for our business and the fact that we are at this stage able to bring many of the benefits of our global platform to bear on USD business and that has a number of scalability benefits.

Heath Terry - Goldman Sachs

Great, thank you.

Barney Harford

Thank you.

Operator

Thank you. Our next question comes from Kevin Kopelman with Cowen & Company. Your line is open.

Kevin Kopelman - Cowen & Company

Hi, thank you. Can you give us any more color on advertising environment you're seeing and how you're able to hold down the marketing expense in Q1? And what are your plans for add spend going through the year? Thanks.

Mike Randolfi

Yes, I mean if you look at our marketing expense as a percentage of revenue, it was less us holding down our marketing investment, it was more attributable to higher revenues due to the timing of certain revenue, overwrite revenue streams that we received in the first quarter as compared to the second quarter. So really no material change there on a year-over-year basis. And I think the way we think about marketing in general, it really -- it's really what's the ROI of the send and what's our ability to generate and acquire customer lifetime value as we're acquiring a transaction today and what's the impact of that transaction over the longer run. So that's the way we think about it and that's the way we'll continue to think about it over time.

Kevin Kopelman - Cowen & Company

The Travelocity Partner Network have less advertising associates with it?

Mike Randolfi

Yes, with regards to the specific line items, you'd be able to -- we're going to in our Q, you'll be able to go through and that we provide a fairly good color with regards to the impact of TPN on specific line items.

Barney Harford

But just in terms of like the way this -- when we look at our private label business in general, the way these things work is that our partners generate demand for the business, we as the principal in that transaction earn a marginal commission on that business, and then we in many cases share some of that commission with our partner. And so that revenue share is booked as a marketing expense. So when you think about the TPN business, while we don’t incur a marketing expense, in many cases we are providing a revenue share to our partner just as we do with the Orbitz Partner Network and that is reflected in the marketing line. Our private label business marketing and promotional revenue is somewhat higher than the blended average of the business and as a result mixed shift towards the private label business would have a deleveraging impact on overall margin.

Kevin Kopelman - Cowen & Company

Okay, thanks. And then I apologize if I missed it, but do you have ADR growth for the quarter?

Mike Randolfi

Yes. In terms of ADRs I mean generally ADRs were up a few percent, a little bit more. But generally I’d say they were up in a 3% to 4% range throughout our business.

Kevin Kopelman - Cowen & Company

Great, thank you.

Operator

Thank you. Our next question comes from Edward Woo with Ascendiant Capital. Your line is open.

Edward Woo - Ascendiant Capital

Yes, thank you. I had a question about your Orbitz Rewards or loyalty program. Is there a royalty program rolled out across all your brands?

Barney Harford

So, at this stage we have in terms of our loyalty program so HotelClub actually is one of the longest standing loyalty programs in the industry. HotelClub’s program, I’m talking about member rewards program launched in 2002 so we have 12 years of history there. And we grew on the history and experience of HotelClub in developing the Orbitz Rewards program for the Orbitz.com brand.

At this stage we have not announced any loyalty-specific initiatives with regard to other brands in particular, CheapTickets and Ebookers. But given how well the program is lifting, you said you might expect that we would be interested in pursuing potential loads of opportunities for other brands.

Edward Woo - Ascendiant Capital

Great. Well, thank you and good luck.

Operator

Thank you. (Operator Instructions). Brian Nowak with Susquehanna. Your line is open.

Unidentified Analyst

Hi, this is Michael [Constantine] for Brian. I have two questions please. First, can you please speak to the impact of your accrual around the loyalty program in 1Q? And then second, your air revenue as a percentage of air booking is a bit higher than usual. What drove that higher in 1Q? Thanks.

Mike Randolfi

Yes, so a couple of things. With regards to the accrual and the way I would think about the accrual is both in terms of what the earn is on air versus hotel. So, there is up to two percentage points on air, up to five percentage points on hotel if it’s booked on a mobile device. And I would think about that earn level relative to what the relative take rates for the businesses are. And so, you would expect overtime that the impact would be greater on the air side.

But right now and it ultimately depends on the redemption. So it’s the reward of the customer taking into account a certain level of redemption and that’s how -- that’s essentially how the accrual works in. Right now we’re essentially in a stage where the revenue or the counter revenue impact is reducing our overall revenue growth rate. But as we indicated overtime, as we shift to more people that are taking the robust redeeming, we are capturing incremental transactions, we have air customers who are catching with hotel, we expect ultimately it will be accretive.

With regards to air take rate, there is a couple of things in the quarter as we talked on the air side that were impacting the air take rate. First, we had overwrite payments that -- airline overwrite payments that we received in the first quarter that we would typically receive in the second quarter. So, when you’re looking on a [copying] basis, we get some benefit in the first quarter relative to last year, obviously that offsets in the second quarter. We also have some air servicing revenue from our relationship with American Express which is also benefiting the take rate in the first quarter.

Unidentified Analyst

Thank you.

Operator

Thank you. And at this time, I’m showing no further questions.

Barney Harford

Great. Well, thanks everybody for joining. And let me take the opportunity to thank everyone on the Orbitz team for the hard work and commitment. And we look forward to updating you all next quarter. Thank you.

Operator

And this concludes today’s conference. Thank you for your participation. You may now disconnect.

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