Orbitz's Q3 Results: There's Light at the End of the Tunnel

As of November 12, Orbitz Worldwide, Inc. (NYSE:OWW), has lost almost 50% of its value, since its IPO in late July. With the weakness in the broad market, the stock has been making new lows recently. It was also weighed down by the apprehension related to interests and taxes, in conjunction with the IPO.

Orbitz's diversified portfolio includes brandnames like Orbitz.com, CheapTickets.com, Ebookers.com, RatesToGo.com and HotelClub.com. The company announced its third quarter results on November 12. For Q3, OWW reported a 11% increase in gross bookings to $2.6Bn. (The Online Travel Companies have thus witnessed a good quarter, with Expedia Inc. reporting a gross booking increase of 16% and Priceline.com marking a 54% growth.). The Q3 Non GAAP EPS came in at 23c, almost 65% higher than analyst expectations. Revenue for the quarter too surpassed the street expectations (Actuals of $221M Vs $212M). While the net loss tripled,YOY basis, to $32M, it was due to costs associated with the IPO. The adjusted EBITDA surged 23% to $43M in Q3. During Q3, the company has witnessed improving momentum at each of its international businesses.

One of the concerns has been the company's concentration in domestic and airline business, which are seeing low growth/ low margin. Though the Q3 results indicate that the mix continues to favor a concentration in these business, it has been primarily due to the company's strategy of pulling itself away from unprofitable traffic, which included certain areas in hotel segment. The company foresees an increasing mix of non-air revenue, going forward. The new ad releases from the company, indicates an increasing focus on the hotels. The doubling of online search conversion of dynamic packages, one of the more profitable segments for OWW, also indicates a momentum towards the new mix.

The company is also showing progress on efficiency front. With Ebookers UK migrating into a new IT platform in July 2007, the company reported a 30% decrease in customer contacts ratio in September (as compared to January). Customer contact ratio is the ratio of service calls received per booking. Customer contact ratio has been declining every month since the new platform launched in July. With all of the 13 of the Ebookers sites expected to finish migration by the end of 2008, added efficiencies are possible. The migration also went in conjuntion with the tripling of UK inventory to 80,000 hotels. With this, and added functionalities on the Ebookers site, hotel growth rates has increased at Ebookers (The monthly hotel transations in September 2007 increased almost 65% YOY.).

Orbitz justified its policy of not competing on price (by cutting booking fee) stating that it is providing extra functionalities, which the users appreciate. The 12% YOY increase in air bookings (air bookings constitute the largest part of the total gross bookings for the company) does validate that stand. As margin pressure is another area of concern, such a strategy will limit a negative impact on the bottom line. However, we are apprehensive whether the company can continue to maintain such growth in air bookings. With the European market seeing aggressive growth and EXPE hinting at a total/ near elimination of booking fee, the jury is yet to be out on the success of OWW's strategy. Nevertheless, at 11x 2008 Earnings, OWW looks cheap compared to EXPE and PCLN which are trading at 19x and 23x respectively. If you are looking for a value stock within a growing industry, look no more.

Disclosure: none