Orbitz Worldwide, Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript

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

Orbitz Worldwide, Inc. (NYSE:OWW)

F1Q08 Earnings Call

May 7, 2008 10:00 am ET

Executives

Shannon H. Burns – Director, Investor Relations

Steve Barnhart – President and Chief Executive Officer

Marsha C. Williams – Chief Financial Officer

Analysts

Vance Edelson – Morgan Stanley

Aaron Kessler – Piper Jaffray

Bridget calling for Imran Khan – J.P. Morgan

Doug Anmuth – Lehman Brothers

Travis Devitt – Teton Capital Group

Jennifer Watson – Goldman Sachs

Brian Fitzgerald – Banc Of America Securities

Jake Fuller – Thomas Weisel Partners

Michael Millman – Soleil-Millman Research Associates

Paul Bard – Renaissance Capital

Peter Gingold – Angelo, Gordon & Co.

Operator

Good morning everyone, this is Cia and I will be the conference operator today. At this time, I would like to welcome everyone to the Orbitz Worldwide First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press *1 on your telephone keypad. If you’ve already done so, please press the $ sign now, then press *1 again to ensure your question is registered. Thank you. I will now turn the conference over to Shannon Burns. You may begin your conference.

Shannon H. Burns

Thank you Cia. Good morning and thank you for joining us for the Orbitz Worldwide First Quarter 2008 Earnings Call. I am Shannon Burns, Director of IR for Orbitz Worldwide. On the call this morning are Steve Barnhart, President and CEO of Orbitz Worldwide and Marsha Williams, the company’s Chief Financial Officer. Before we get started, I would like to remind you of the queue items. First, that the broadcast, reproduction, and retransmission of this conference call or the webcast without the expressed written consent of Orbitz Worldwide are strictly prohibited. Second, if you did not receive a copy of our press release, it is available on our investor relations website at www.orbtiz-ir.com. Additionally, this webcast will be archived on the site for a period of at least 90 days. An mp3 file of the call and a transcript will also be posted on our site. Third, some of the statements made during this call constitute forward-looking statements that involve known and unknown risks, uncertainties, and other factors including the risk factors described in our Form 10-K filings with Securities and Exchange Commission on March 21, 2008. These risks and uncertainties may cause our actual results, performance, or achievements to be materially different preventing future results, performance, or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements. Also, I would remind you that the media are participating in this call in a listen-only mode. Finally, during the call, we will be referencing certain non-GAAP financial measures as defined by the SEC rules. Where required, we have provided in our press release or on our website a reconciliation of those measures to the GAAP financial measures we consider to be the most comparable. The release is available on our website. At this time, I would like to turn the call over to Steve Barnhart, President and CEO of Orbitz Worldwide.

Steve Barnhart

Thank you Shannon. Good morning everyone and thank you for joining us. Based on year over year performance, Q1 was a challenging quarter for Orbitz Worldwide; that was not a surprise. We knew going into the quarter as we discussed on our last call that maintaining our growth against the strong results we achieved in 2007 would be challenging. Our results were consistent with those expectations. We are not satisfied with these results. We are confident that we have the product and marketing plans in place to drive improved results and you will start to see the impact of those initiatives as we begin rolling them into the market over the balance of the second quarter. Before I go into our plans and performance in more detail, I want to address specifically a few aspects of our topline and bottomline performance in Q1. Our topline performance continued to be impacted primarily by three factors. One, our offline advertising is drawing an insufficient number of consumers to orbitz.com. Two, we have not brought major innovation or new features to our US sites since the fall of 2006; so we’ve not given our consumers enough reason to convert on our sites. And three, we are seeing the marketplace for online traffic to get much more competitive with significant changes starting in the latter half of Q3 2007.

We’ve taken specific actions addressing all of these areas, which I will discuss, and we expect improvement in topline growth each quarter through 2008. The largest impact on our bottomline performance year over year was simply that we lapped our strongest quarter for volume growth in 2007 with what we expect will be our weakest quarter in 2008. However, there were two other meaningful items that are less apparent. In 2007, we began a significant investment in hotel market managers to fuel international hotel growth. We did not incur meaningful costs for this in Q1 of 2007, but these costs became meaningful in Q2 and ramped throughout 2007. The net impact for Q1 2008 was an increasing cost of a few million dollars year over year for international hotel market managers. We added additional market managers in the first quarter of 2008 and plan to continue investing in more international hotel market managers throughout the year. The second meaningful item was some unusual costs in Q1. Most significant was several million dollars in costs for the charge-backs mentioned in our earnings release. Improved controls are in place, and this should not present an issue going forward. Without the unusual costs and the year over year impact of ramping up our international hotel market manager team, you would have seen a materially stronger year over year comparison in adjusted EBITDA in Q1. Marsha will give you more detail on Q1 financial performance. At this point, I will transition to how our business is positioned for future growth and what you should look for from us going forward.

We have targeted our efforts toward improving our performance where we have come up short and adapting our business in light of changes in the market so that we are capable of delivering solid sustainable long-term growth consistent with the benchmarks we have communicated. All major businesses and business areas are performing well with the exception of the transaction-based portion of our US Online Travel Company or OTC business. Our big initiatives going into 2007 were accelerating growth in our international businesses, significantly advancing our global technology platform, and improving our non-air mix. We had great success in international, solid results on the global platform, and very good results on non-air in international. We did not make the progress we wanted on non-air in the US. Our Orbitz marketing campaign has not delivered the needed results, and we did not anticipate the magnitude of the changes in online marketing for travel services in the US. With strong growth in our international businesses and solid progress in rolling out the global platform, we have materially shifted our focus back to the US. We believe that we can deliver the needed turn-about in the US while sustaining strong international growth. We are well down the path to restoring performance in our US OTC business. April growth rates were stronger than Q1 growth rates, and we will be undertaking two key initiatives over the next few months that we expect will further strengthen growth. The first is, launching new Orbitz advertising this quarter that we believe will accomplish two goals that our Orbitz advertising did not achieve in 2007; first, capture the consumer’s attention in a way that draws them to visit our site. The advertising we have been running since mid 2007 has not done this as effectively as it should, and the wear-out factor, the degree to which performance drops off as the campaign runs has been high for this campaign. Second, highlight features for consumers that will drive them to search and book on orbitz.com. Our 2007 campaign focussed on Orbitz TOC, which is a valued product to our customers, but featuring high quality service at the level of sustained focus we gave it did not cause a sufficient number of undecided consumers to shift their bookings to Orbitz. The second key initiative is introducing functionality that gives customers new reasons to search and book on Orbitz or CheapTickets. To regain more of consumers mind share and hence more of the traffic and to improve conversion, we plan to offer consumers new capabilities that will both draw them to our OTC sites and incent them to book there. An example of user focused functionality is myidealbeach.com, a tool that allows consumers to search for a beach vacation without knowing where they want to go or when, just knowing what kind of experience they want to have, knowing exactly where you want to go and generally knowing dates as well is a necessity on virtually all sites where you can book travel today, but myidealbeach.com frees consumers from these restraints. By the end of the quarter we expect to roll out additional new functionality that we believe will give consumers significant reason to make their bookings on orbitz.com. While myidealbeach.com is attracted to one group of customers, this new functionality will give all consumers a new reason to search and book on orbitz.com.

New marketing and new features are the key factors that will accelerate gross bookings and revenue growth as we move through the year. But while we want to focus you on what we are actively doing to fix our US performance, it is also true that we had easier overlaps each quarter as we move through 2008. One reason that our overlaps become easier is that we progressively reduced our reliance on paid search as a source of traffic and transactions throughout 2007 and into 2008. From very early on both Orbitz and CheapTickets focused on online marketing as a source of traffic in transactions in part because it did not have major portal contracts to rely on for traffic. This proved a great advantage in driving growth as search marketing expanded rapidly, more rapidly than most other potential sources in traffic. However, it caused both sides to become increasingly reliant on a big market place where traffic could be purchased by any competitor. Over time, not only OTC competitors but supplier sites, travel research sites, and medi sites all became competitors for this traffic. In the latter portion of 2007, our reliance on online marketing in US became a negative as growth in total traffic from paid search began to slow but demand for that traffic did not. The costs of online traffic spiked and costs remained significantly elevated from where they were in early Q3 2007. Our responses didn’t remain economically efficient. This has cost us traffic and transactions, but we believe these transactions would have been largely unprofitable. As we shrink our reliance on paid search, we are focused on building other sources of traffic and transactions whether through marketing, functionality, or other relationships. As an example, our reliance on paid search as a source of hotel transactions on orbitz.com was at half the level in January 2008 than it was January 2007. As we begin to lap this movement away from paid search in the back half of 2008, you will see an improvement to our year over year growth rates, and one that is not fueled simply by spending additional dollars on online marketing.

At this point, I’ll move from a discussion of the transaction portion of our US consumer business to a discussion of our other business areas, each of which continues to deliver strong performance. One of our strategic initiatives is building our presence in rapidly growing international markets via our European OTC site, ebookers, and our global hotel business, HotelClub. In Q1, we achieved a sixth consecutive quarter of greater than 20% growth in our international businesses. At ebookers we are on track to have all of our sites transitioned to the new global platform by the end of this year. The next site to launch will be Belgium which will serve our customers in two foreign languages, French and Dutch. That site, our first with multiple languages, will launch early this summer. In the first quarter gross bookings at ebookers increased 44% versus the first quarter of 2007. Gross bookings growth in continental Europe in Q1 approached 60%, somewhat faster than the above 50% rate we quoted here for Q4. I should note that these rates are on a constant currency basis. On a reported basis, growth in continental Europe was above 70% in Q4 and above 80% in Q1. Our UK site is benefiting from having three times more hotel inventory on the new global platform than on the old platform. This, along with the Euro-Dollar exchange rate, is driving strong traffic from the UK to US locations with gross bookings for hotels in the US at almost 9 times Q1 2000 levels. At the same time, cost for ebookers transaction declined as service call volume dropped to 20%, while transaction volumes grew. As we extend the global platform to additional countries, it will bring the benefit of additional inventory to those ebookers sites and we expect this to support growth in hotel bookings. Similarly, we expect to see further cost efficiencies as the platform reaches new countries. At HotelClub, we achieved a 31% increase in gross bookings as we benefited from the increase in the size of our hotel sourcing team and the corresponding increase in direct merchant hotel relationships. Growth was particularly strong is key Asia Pacific markets. Part of our success in signing new hotels is being easy to do business with and a new extra net for the hotelclub.com site makes it easy for hotel partners around the world to adjust their rates and availability on that site directly. Another strategic initiative for HotelClub was the launch of DreamClub in April as an extension and enhancement to the existing HotelClub Rewards Program. HotelClub currently has nearly 6 million registered members, who on average convert at a rate that is significantly higher than that of the average consumer. In the second quarter, there are several changes taking place in our HotelClub business at both our hotelclub.com and ratestogo.com sites that we believe will sustain strong growth over the balance of the year. We are doing design refreshes on both sites and adding new languages and currencies to reach more customers. Rates To Go, a last minute hotel booking site, extended its booking window from 21 days to 28 days, which we expect will drive growth in that business as customers look for last minute values.

We also made progress in the first quarter on our strategic objective of building our non-air business. To that end, we continue to build our hotel sourcing team in the quarter, especially in Europe and Asia, increasing the total staff by 13% over the year end 2007 level. This team is charged with increasing the number of hotel properties that we can offer our customers and with building direct relationships with existing hotels that currently offer their inventory on our site throughout indirect relationships. Direct relationships allow us to better service and market hotels and often enable us to improve the breadth of inventory for sale. We added over 5000 direct hotel relationships in the first quarter. We signed several major new hotel contracts in the first quarter in additional to the Marriott contract that we discussed on our fourth quarter call. A new distribution agreement with Carlson Hotels Worldwide increases direct access to over 1000 hotels worldwide for all of our brands. We also signed agreements with Harrah’s Entertainment that provides us with additional inventory at all Harrah’s properties and with the new Trump International Hotel & Tower in Las Vegas. We signed a number of other agreements in the first quarter with hotel groups worldwide including the Kempinski group which has properties throughout Europe, Middle East, Africa, South America, and Asia, and Peninsula Hotels with luxury hotels in Asia and the US.

Looking at our other business areas, attachment rates for services and attractions have increased significantly as we have added new functionality to cross sell more effectively and better target those products at the property level. One initiative we have launched to grow this business is the introduction of Destination Specialists for some of our most popular destination markets. Customers browsing on certain vacation markets on orbitz.com can get a message asking if they would like to speak with a live representative. If customers respond, they can talk with a trained specialist who can help them put together their ideal package of air, hotel, car, attractions, and services. The size of these assisted transactions is significantly larger than average. Advertising revenue was strong in the quarter, growing nearly 35% compared to the first quarter of 2007. Orbitz for Business continues to expand by adding new customers. The first quarter was the best quarter Orbitz for Business has ever recorded for new business sold with major wins including Fujitsu and Michaels Stores. Contracts for Orbitz for Business clients are generally multi-year, so this growth enhances a significant stable base of business.

One last topic I will address before I turn it over to Marsha is our view on the impact of the US and global economy on our business. I do not feel that our view here is unique, so I will be brief. Current trends in our businesses do not indicate any major pull-back in leisure or corporate travel to date. We do see softening in some markets, primarily leisure. We have had more interest from hoteliers in assisting them and filling rooms preferably through packaging, but also through other promotional activity. This is consistent with external data that indicates softening of occupancy rates, but ADRs that are largely holding level or increasing, although increasing more slowly than in 2007. On air, we continue to see US consumers traveling and expressing interest in traveling despite pulling back on discretionary purchases they seem to feel are less critical than things like the summer family vacation. We do expect they will travel differently to economize, but we have little discernible evidence of that to date. If they do, our risks are somewhat mitigated by the fact that our US air revenues are largely fixed per ticket; so consumer migration to tickets for shorter flights, lower classes of service, or simply lower costs do not materially impact our revenues. To date, it does not appear that higher air ticket prices have trumped higher gas prices as consumers make their drive versus fly decisions. Airlines have communicated reductions in seat capacity; however, much of this will come into play after the busy summer season when demand is not as high. Possibly offsetting some of these risks are that when consumers want value in their travel, there is no more obvious place to go than cheaptickets.com and packaging on both Orbitz and CheapTickets remains a great way for consumers to gain additional value and to travel. Net net, there remains a good deal to be watchful about, but we have not yet seen an obvious tipping point where consumers move from being cautious in how they spend their travel dollars to a significant pull-back.

To recap before turning it over to Marsha, over the next few months, you will see that we have regained our stride in the US as we launch new capabilities and marketing. You certainly did not see that in our Q1 results but as the investments made in our international businesses and in the global platform continue to pay off and we combine that with improving US performance, we expect to deliver performance in the second half of 2008 that steps up to the benchmarks we laid out as our strategic initiatives which remain building our presence in rapidly growing international markets, increasing the percentage of our business in higher profit non-air segments like hotels and dynamic vacation packages, and continuing to improve our operational efficiency with a target of an adjusted EBITDA margin in the mid 20s in 4 to 5 years. I’ll now turn it over to Marsha.

Marsha C. Williams

Thank you Steve and thank you for joining us this morning. Today, I’d like to focus on trends in our revenues as well as the strength of our international business. We are very pleased that our international growth bookings grew by 41% in the first quarter of this year as compared to the first quarter of 2007. Growing our international business has been an area of particular focus for us over the past 2 years, so we are happy about our international growth this quarter. As you will recall, we’ve had a number of changes in our business within the last year. In order to put our first quarter 2007 net revenue on a comparable basis with 2008, we’ve added back the impact of purchase accounting adjustments that reduced reported revenue in the 2007 period, and we have also removed the impact of TravelBag, the offline UK travel business, which we sold in July 2007. We refer to this calculation as adjusted net revenue and we have posted a schedule on our website that lays out these adjustments. We have also posted information on our website that highlights the impact of foreign currency fluctuations on our revenues. On an adjusted basis, net revenue increased 4% in the first quarter of 2008 as compared to the same period of 2007. International adjusted net revenue increased 28% in the first quarter compared to 11% on a reported basis. After adjusting for foreign exchange, international adjusted net revenue increased 16% in the quarter. This growth was led by ebookers which increased adjusted net revenue to 33 million or 32% over adjusted net revenue for the first quarter of last year. The increase in ebookers is largely attributable to strong growth in air revenue. Revenue from car rentals and dynamic packages also posted very strong growth, but these are much smaller pieces of ebookers business. HotelClub’s adjusted net revenue increased 20% to $18 million on a 31% increasing gross bookings. US domestic adjusted net revenue was $168 million or 2% lower than adjusted net revenue for the first quarter of 2007. As we have mentioned, our domestic air business was soft this quarter. We had a decrease in our domestic air transactions but we did book higher revenue per air ticket. This increase was due in part to a higher mix of international flights booked on our domestic sites as well as an increase in our GDS revenue from Worldspan. Our domestic business also benefited from higher revenues from insurance and advertising as well as a modest increase in hotel revenues.

Looking at our business from a product perspective, we are pleased that our international air adjusted net revenue increased by 31% or 21% on a constant currency basis. Overall, our air business declined which reflects the weaker domestic air business we mentioned previously. Strong transaction growth in our international air business was offset in part by lower revenue per air ticket. This lower revenue per air ticket internationally was largely the result of an increase in short-haul flights in Europe and the introduction of additional low-cost carriers on ebookers site. Adjusted net revenue for non-air and other products which consists primarily of hotel, car, dynamic packaging, advertising, and insurance increased 7% in the quarter.

Turning to the rest of the income statement, our cost of goods was higher this quarter than it was the year ago, primarily due to a higher level of charge-backs at one of our international locations. We have installed new security software and expect these charge-backs to decline during the second quarter. As we have said in the past, we expect our cost of goods as a percentage of sales to be in the 16% to 18% range on an annual basis and we continue to be comfortable with that general range going forward. SG&A increased 10% over the first quarter of 2007. This increase was driven partially by higher head count levels. We have continued to add staffing to build our international hotel sourcing team, and we believe this team will be a strong contributor to the growth of our international business. As compared to a year ago, we have also added staff in a variety of required corporate functions such as external financial reporting, treasury, law, tax, international internal audit, and stocks. We also recorded additional stock compensation expense this quarter due primarily to stock related grants made in conjunction with the IPO. As you will see from the cash flow statement, we also spent less on capital this quarter which basically meant that we capitalized fewer of our internal software development costs and those increased SG&A as well. This lower capitalization is partially because we have largely completed the major development on our new European platform. In total, the entire costs as well as some of the impact from currency fluctuations in Europe were offset in part by an insurance reimbursement relating to our hotel occupancy tax litigation.

Marketing expenses increased nearly $3 million or 4% in the first quarter. The majority of the marketing increase supported our strong international growth. Domestically, marketing expense declined slightly in conjunction with our decline in transactions. For the first quarter of 2008, adjusted EBITDA was $21 million. We calculate adjusted EBITDA consistently with the way management runs the business, adjusting out the non-cash and one-time items. With respect to the first quarter of 2008, we’ve made three adjustments. The first is $4 million relating to stock compensation expense; the second represents the cost we continue to incur in professional fees, primarily audit and tax that we believe are one-time in nature as we transition functions from Travelport and build our inter-company infrastructure. These totalled $2 million in the first quarter and we expect them to decline as the year progresses. Finally, we also incurred $1 million in severance expenses. We have provided a schedule that reconciles EBITDA and adjusted EBITDA in our press release.

Net interest expense in quarter was $16 million. Interest expense includes cash interest of $11 million on our $600 million term loan and our $85 million revolver, and non-cash interest of approximately $5 million that accrues on our tax year end liability with the airline. Subsequent to quarter end we took advantage of the dip in interest rates and entered into another interest rate swap. Our new swap will fix approximately $100 million of our term loan at an all-in rate of 6.39% for 3 years. So, we now have $400 million of our total $600 million term loan at a fixed rate basis. Turning to the balance sheet, I’d like to highlight a couple of points. Because of the seasonal pattern of our business, our first half of the year is when we build our cash position. At the end of the first quarter, we had cash balances of $117 million with nothing outstanding under our revolver. Our current cash balances are at approximately the same level. As you can see, our merchant hotel payables grew 49% in the quarter compared to the level at year end reflecting the growth and seasonality of our merchant hotel business. Our cash in merchant hotel payables build in the first half of the year as customers book their vacation travel and then settle in the third and fourth quarters as customers complete their travel and the hotels bill us. That concludes my recap of our financial results and now we will be happy to take your questions.

Question-And-Answer Session

Operator

We’ll pause for just a moment to compile the Q&A roster. The first question is from Vance Edelson with Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi good morning, thanks for taking the question. I was intrigued by the higher mix of international flights booked domestically – what do you think would explain that mix shift and the international flights seem less susceptible to whatever is weighing on the domestic travel? Thanks.

Steve Barnhart

Vance, I think there are really two things there – in terms of the shift we have seen – if you looked at the percentage at the site, a shift of air travel away from Europe and into Mexico and to a lesser extent the Caribbean; so where people are traveling internationally has shifted and I think as you look at the way our position has evolved over time gives a relative value add we bring on international flights where there are more flight combinations and more opportunities to deliver savings option to customer is superior and I think it’s not surprising to see our mix shift to that direction over time.

Vance Edelson – Morgan Stanley

Okay, thanks, and on the staffing levels to ramp up international – can you give us a feel for how that trends from here, is most of the ramp up behind us at this point?

Steve Barnhart

We still have some additions we want to make through the balance of the year but it does ramp down, so yes, the biggest pieces of it, we are already beyond.

Vance Edelson – Morgan Stanley

And is it the same for the internal accounting related staffing – does that also trend down from here?

Marsha C. Williams

Yes, the additions certainly trend down. I think we are largely through, we may have a few areas where we would need to add a person or two, but I would say in general we are largely fully staffed.

Vance Edelson – Morgan Stanley

Okay, great. And one last question – is it safe to say that the ebookers international rollouts become easier as you go, as you gain experience, and roll it out from country to country?

Steve Barnhart

Absolutely. We started with the UK and we did our first foreign currency as we moved to the Euro with Ireland; now we’re doing our first multiple language site in Belgium; really once we get beyond that, there are no major new capabilities that we need to test or introduce for the first time, which is why the cycle time and rolling outs for many countries is much much shorter.

Vance Edelson – Morgan Stanley

Okay, I appreciate the color. Thanks.

Operator

The next question is from Aaron Kessler with Piper Jaffray.

Aaron Kessler – Piper Jaffray

Hey guys, a couple of questions. First, can you give us some commentary on what the UK growth looked like and do you think the acceleration in continental Europe from Q4 to Q1 was ebookers gaining share or think it’s overall strength in online bookings in Europe? And one followup question.

Steve Barnhart

Yeah, continental Europe has – as long as I’ve been involved, ebookers has been much stronger than the UK, I think initially because of both lower penetration rates and better economic condition, so continental Europe is certainly stronger than the UK. I think we’re growing relative to an online travel company as opposed to hotel specific company. Based on our data, I would think we are growing faster than the average. That may look a little differently if you approach from a hotel only point of view.

Aaron Kessler – Piper Jaffray

Great, and then in terms of the wages and benefits that might have missed us, but I think they are up about 8 million sequentially and much higher than levels last year, is this due to the some of the one-time expenses you talked about and when should we think about more normalized levels for this expense line, and also on the COGS side, should we expect more normalized levels starting Q2?

Marsha C. Williams

On the wages and benefits, I would say that some part of that simply reflects the fact that we have included stock option expense in our numbers which wasn’t there last year, so that was one adjustment that we adjusted out of EBITDA, but that will definitely stay. So, if you’re comparing pre- and post IPO numbers, those numbers will run through that. I believe that we are largely through the significant add in wages and benefits as we said we’ve got a few places where we may add some more people on the public company function, but I don’t think you’re going to see a major shift in wages and benefits going forward. Your other question was?

Aaron Kessler – Piper Jaffray

Based on the cost of goods sold, can we see more normalized levels in Q2?

Marsha C. Williams

Yeah, on the cost of good sold, as we said, we did have cost of goods sold run almost 20% this quarter and that was higher than expected. We have put some additional measures in place to take control of some of the security issues that we encountered and we expect that those measures will kick in during the second quarter. We’ve already obviously installed those and so we would expect our cost of goods sold to improve during the second quarter and return to a more normalized level.

Aaron Kessler – Piper Jaffray

Great, thank you.

Operator

The next question is from Imran Khan with J.P. Morgan.

Imran Khan – J.P. Morgan

Hello, this is Bridget calling in for Imran. I’m wondering if you could look at the domestic advertising – it sounds like you’re starting up a new offline advertising campaign – should we expect to see an increase in marketing spend as a result of this?, and also what leads you to believe that you can gain traction from your offline campaigns and cut back on online spends? Thank you.

Steve Barnhart

Sure, as we roll the new campaign, we will support it on levels that are slightly higher year over year in terms of offline spend; so, you won’t see any increase in offline spend that is out of line with what you would expect in a normal year-over-year growth in the business view, but we will support the campaign as we launch it, and throughout the balance of the year. We do expect that we can get significantly more benefit from our offline campaign. I mentioned two reasons upfront – I just want to reiterate one – the campaign itself, the targeting of TLC we found has not – it’s a very important benefit to our customers, but in terms of changing the view of people that are undecided, that aren’t loyal to the site, it simply wasn’t as effective in moving them to book to our sites as we needed it to be, and again the wear-off factor or the effectiveness of the campaign over time really dropped off much more rapidly than was seen in earlier campaigns; so the benefit we were getting from that campaign at this point versus the quality of the new campaign we will bring out, we think will be materially different. In terms of online, online will continue to be an important piece of our mix. It’s particularly the search marketing area where we’re trying to re-balance our dependence on that, again remaining economically efficient and building up our strength in other areas, whether that be search engine optimization, data mining through our expanded data warehouse, or improving the quality of our tools, we’re going to continue to invest and build our strength in that area, but we think historically we’ve become overly dependent perhaps on search marketing, and as this cost really accelerated last year, that was a negative for us, and again as we start to lap that in the back half of this year, you’ll see a material improvement in our growth rates.

Operator

The next question is from Doug Anmuth with Lehman Brothers.

Doug Anmuth – Lehman Brothers

Great, thanks for taking my question. First one, I was hoping you could provide some more color on the revenue margins, specifically looking on a year over year basis between US and international, but US came in somewhat higher than we would have expected and the international somewhat lighter, so wanted to check if this is just sort of purely a mixed issue or if there’s anything else going on there, and then, also can you comment a little bit about what kind of alternatives to paid search you found successful thus far? And third question, just on your outlook going forward, you talked about cost of revenues, you also talked about EBITDA margins over 4 to 5 years, is it still reasonable to think that the long-term target of the 9% to 12% increase in bookings and revenue that you could return to those metrics in 4Q, any chance we could see that before the fourth quarter? Thanks.

Steve Barnhart

Sure. Doug, in terms of the revenue margins, I think in the US, one of the differences you’d see between the US and Europe is our air margin in the US held up very well, even moving up a little bit where our margins in Europe as the mix shifts from – ebookers historically had a very strong base in long-haul flights and a much lesser presence in short-haul and low-cost carriers. As we get the growth from bringing in those short-haul flights and the low-cost carriers, they simply don’t bring the same margin as the long-haul flights, so you are going to see differences in the US air revenue margins and the European air revenue margins. In terms of alternatives to online search, our biggest impact this year we expect to come out of driving a very effective offline marketing campaign and combining that with new functionality on this site that’s going to be very exciting for consumers. Putting those two together, we’ll be able to present consumers with very compelling reasons both to visit our site and to book on the site; so that’s going to be the biggest impact you’ll see this summer and through the rest of the year, but we do continue to improve our capabilities in search engine optimization, we continue to invest in the infrastructure used to manage search, and we continue to invest in our e-mail and other ways of connecting with customers that give us the ability to mine the data we have to very cost effectively bring additional traffic to the site. So those are the key areas we’re focused on in terms of offsetting that reliance on search.

Doug Anmuth – Lehman Brothers

And the final question in terms of the outlook returning to the long-term growth target of the fourth quarter?

Steve Barnhart

Yeah, we feel that we can get back to that long-term growth target. I believe we described the last time as getting back to that level sometime in the third quarter, not necessarily for the full quarter, but we would expect to reach that as we enter the fourth quarter.

Doug Anmuth – Lehman Brothers

Okay, great, thank you.

Operator

The next question is from Travis Devitt with Teton Capital Group.

Travis Devitt – Teton Capital Group

Hi guys. I was hoping if you could give us a little color on whether or not international EBITDA margins were positive – if you could give us a sense for profitability of the international business currently?

Marsha C. Williams

Sure, we don’t break out EBITDA profitability internationally by segment, but we have said consistently that HotelClub is a profitable business for us and that ebookers has had an improving EBITDA performance, meaning that the losses that we incurred in ebookers have been coming down and we’re definitely on the path toward profitability, particularly as we see our revenues grow. One of the things we have commented on is the turn-around in performance. Ebookers will be both a combination of an increase in revenue as well as a reduction in expense; so, as we roll out our new platform in Europe, we believe that we can continue to reduce our operating expenses in Europe, and as you can see from this quarter, we’re pretty confident in the way that we’ve been able to grow the topline at ebookers.

Travis Devitt – Teton Capital Group

So, the trajectory was certainly the ebookers of continuing improvement?

Marsha C. Williams

Yes.

Travis Devitt – Teton Capital Group

Okay. Thank you.

Operator

The next question is from Jennifer Watson with Goldman Sachs.

Jennifer Watson – Goldman Sachs

Thank you, two questions – first, can you just discuss how much an early Easter helps pull some revenue from Q2 into the first quarter and would we still have seen the same bump-up in that revenue rates if the Easter timing hadn’t shifted? And then secondly, if you can just talk a little bit about some of the consumer booking fee testing that you’re seeing some of your competitors do both domestically and internationally? Your views on that.

Steve Barnhart

Sure. Jennifer, on Easter, it’s difficult to be overly precise in that but I think the one difference you’d note for us versus some of our competitors who are much more hotel centered is – there is more of an impact on the hotel business than there is on the air business with the movement of Easter. With hotel bookings, our revenue recognition occurs when the stay happens. So, when Easter moves from April to March, the hotel revenue from the stays move from April to March; however, air revenues recognize when the ticket is booked. So, if someone books in March for Easter, whether Easter occurs in April or March doesn’t matter for revenue recognition. So, we would see a much less dramatic impact in our P&L than competitors who have much bigger hotel businesses would see in their P&L. So, I wouldn’t spend as much energy trying to think about that in our P&L as you might with other people in the industry.

Jennifer Watson – Goldman Sachs

Okay, great.

Steve Barnhart

In terms of consumer fee testing, we certainly see people testing a wide variety of fees. We see in general people moving to higher fees. So, although we do see a lot of testing going on, where it is netted out at this point seems to be toward higher fees versus lower fees with the notable exception of the opaque sites. Our view on fees has not changed. We believe that we offer value that consumers are willing to pay that fee for, and we do not see that it would make sense for fees to go away.

Jennifer Watson – Goldman Sachs

Okay, thank you.

Operator

The next question is from Brian Fitzgerald with Banc Of America Securities.

Brian Fitzgerald – Banc Of America Securities

Thanks guys. You mentioned UK had strong traffic in bookings, other competitors have noted – yeah they saw strength, but it was kind of moderate in that geography due to some changes in the pound versus the dollar and the Euro – wondering if you’re seeing any impact of this sort yet? And to follow on, a technology question, recently Travelport acquired the travel assets of G2 SwitchWorks – wondering if you think if your GDS partners acquired to play these genie technologies that you could at some point see benefit with you and the other OTIs.

Steve Barnhart

Yeah, in terms of Europe, our growth accelerated in continental Europe as we noted upfront on a local currency basis from the 70% growth range to over 80% growth; so, we certainly didn’t see a slow-down in continental Europe now. Different companies have I think materially different mixes of countries in the continental Europe, so I really can’t speak to a direct comparison without knowing that detail, but certainly, at this point, our growth continues to be pretty good. In terms of G2 and the genies, I don’t think there’s any material there that I would be thinking about in terms of what it would mean to our business – I don’t really have any further comments on that.

Brian Fitzgerald – Banc Of America Securities

Okay, great. Thank you.

Operator

The next question is from Jake Fuller with Thomas Weisel Partners.

Jake Fuller – Thomas Weisel Partners

Hey guys, hopefully you can give us a little bit color on the ebookers UK experience on the new platform; in the last quarter you gave us a little bit sense of the trend line there, any color?

Steve Barnhart

Jake sure – the benefits that we expected to get, the improved hotel performance, improved packing performance, the improved customer service experience, and the improved efficiencies are all in place. The overall macroeconomic environmental in the UK has not strengthened, if anything, it has weakened; so, there are general industry factors in the UK that are impacting this growth, but the benefits from the platform are they continue – I think now would be the third quarter of results – and we continue to see very solid results and improvements in fact where we continue to add functionality and tweak functionality and optimize performance of the platform.

Jake Fuller – Thomas Weisel Partners

In the last quarter you had talked about changes in mix under the new platform, I think in specific, talked about the pickup in hotel sales with the new platform in place – same trend still playing out?

Steve Barnhart

Yes, we’re still seeing much stronger hotel sales. I think we referenced the 9 times as much in the US – in the quarter 1 of ’08 versus quarter 1 of ’07 on ebookers selling 9 times as many hotels for people from UK coming to the US. Now that’s obviously a combination of both the enhanced inventory as well as the dollar-pound relationship, but if you looked at our key sites before, New York would have been the one that would have registered in several of the European countries. Las Vegas, as an example, has moved considerably up in the rankings as we’ve dramatically expanded the inventory we’re offering to consumers in the UK and Ireland out of Las Vegas.

Jake Fuller – Thomas Weisel Partners

And I guess lastly from a bigger picture standpoint, Expedia continues to pretty aggressively invest in building up a media-based platform – any plans on that front to step-up the investment?

Steve Barnhart

Well, again we saw a mid 30s growth in our advertising business in the quarter. We’ve continued to grow that business strongly over time. We certainly look at options to expand that. We’ve looked at a number of different potential areas and ways to do that, both in terms of the way we manage on our existing sites and looking at ways to build beyond that, but beyond evaluating those things and focusing very much on what we’re doing organically on our sites, I don’t have anything this morning, Jake, that I would have to discuss with you.

Jake Fuller – Thomas Weisel Partners

Alright, thank you.

Operator

The next question is from Michael Millman with Soleil-Millman Research Associates.

Michael Millman – Soleil-Millman Research Associates

Thank you. Could you tell us what the adjusted EPS was for the quarter?

Marsha C. Williams

Hi Michael, this is Marsha. As we are potentially moving into a taxable position in the US, one of the things we concluded was that it probably made more sense for us just to focus people on our GAAP EPS numbers. We obviously will still report adjusted EBITDA because we think that makes sense, but as we started to calculate all of the impacts on adjusted EPS, we realized that probably going forwards it just makes sense to focus people on the GAAP number.

Michael Millman – Soleil-Millman Research Associates

Would there be a major difference between the GAAP and the adjusted?

Marsha C. Williams

Not really a significant difference.

Michael Millman – Soleil-Millman Research Associates

And also, what is the amount of your advertising revenue.

Marsha C. Williams

We’ve never actually broken out the advertising revenue. I can tell you it’s been growing nicely, and we expect to continue to grow. We have some good programs in place and obviously we continue to build relationships with all of the customers who advertise on our site, but in terms of a specific break-up – that’s not something we’ve ever provided.

Michael Millman – Soleil-Millman Research Associates

Is it a material number?

Marsha C. Williams

It certainly is a number that’s growing for us and it’s a number that we continue to focus on because obviously margins on advertising revenue are terrific. It’s certainly a growing number.

Michael Millman – Soleil-Millman Research Associates

Is it moving the needle on your revenue number?

Marsha C. Williams

In terms of moving the needle, obviously the bigger items on the revenue number really relates to our air business and our transaction based business as well as our international operations. So, is it moving the needle – I would say yes, but it’s moving it – in terms of dollar amount – a fairly small dollar amount, but on a percentage basis, it’s a meaningful movement in the growth in advertising revenue.

Michael Millman – Soleil-Millman Research Associates

And regarding the international business – the ebookers business – how much business is being sourced out of the UK versus the continent, and can you talk about what the trends are and what the growth rates are.

Steve Barnhart

Mike, I think your question is – is this growth at ebookers in continental Europe versus the UK? Is that correct?

Michael Millman – Soleil-Millman Research Associates

Where the customer is located, not where they are going.

Steve Barnhart

Oh I see. Most of our bookings are from people within the countryside. So as we talk about continental Europe versus UK, I think it’s fair for you to assume that the vast majority of the bookings, as we talk about continental Europe, are from people in those countries in continental Europe, and when we talk about the UK and Ireland, it’s a similar situation – the vast majority of the bookers are people in the UK and Ireland.

Michael Millman – Soleil-Millman Research Associates

Okay. And then on the domestic – has the shortfall been in both traffic and conversion, and does it differ between CheapTickets and Orbitz.

Steve Barnhart

It’s really traffic. It may continue to improve conversion over time – it’s really again in the online space – obviously pull-backs and adjustments we’re making based on the cost of traffic, and in the offline space, traffic we’re not getting at the level we should because our marketing has not been pulling people at the level they should, but we do not see it as a conversion.

Michael Millman – Soleil-Millman Research Associates

Okay. Is conversion the same in CheapTickets and Orbitz.

Steve Barnhart

There are differences. It’s a different consumer base. When we get a consumer base on cheap ticket, that is more air centric, and that certainly impacts their likelihood to convert on different products. So, it varies across segments.

Michael Millman – Soleil-Millman Research Associates

And finally, I missed the earliest comment. Did you give some rough guidance to the second quarter?

Steve Barnhart

No Michael, we did not give any rough guidance for the second quarter. At this point I think we should see if there are other questions. Cia, are there any other questions online?

Operator

There is a question from Paul Bard with Renaissance Capital.

Paul Bard – Renaissance Capital

Thanks for taking my question. I appreciate [inaudible] can get in here. My question, Marsha, I was wondering if you could just talk about the cash flow from operations generated in the quarter. It looks as if even if I adjust for the increase in cash taxes that cash flow is down pretty meaningfully year over year, and it seems like it was, I think, at the flow till I get on the merchant payable side, and I was wondering if you could just talk about the swing factors there, if it is just the timing issue or if something else is driving that. Thanks.

Marsha C. Williams

Sure. Let me specifically address that. There are two items that had a pretty big impact on cash flow from operations this quarter. Ironically, they are both $14 million. So let me explain what those are. If you look at the third quarter of 2007, we had noncash interest expense of $19 million, and that represents the fact that we settled our inter-company interests with Travelport on a noncash basis. So we have a $14 million swing in our noncash interest. So that represented $14 million of the swing. If you also look at the balance sheet, we had a due from Travelport at March 31, 2008, that we didn’t have at March 31, 2007, and that’s just the normal settling of transactions that we have from Travelport. We actually got that money I think in early April. So two of the items, again each of which were $14 million, a total of $28 million related to cash taxes versus noncash taxes and settlement of our inter-company with Travelport. So, if you kind of normalize 2007 to put them on an apples-to-apples basis, the differential in our cash flow is really about $11 million, and we’re just primarily priming some of our cash taxes as well as some of the expense increases that we talked about.

Paul Bard – Renaissance Capital

Great. That’s helpful. And then, I guess, looking forward – I know you don’t give guidance on this – but can you help us out in just understanding the cash flow for the year, the up versus 2007, and knowing that probably CapEx I would expect to maybe be down or flat – just help us in terms of the cash flow generation of the business – what to expect for the year.

Marsha C. Williams

Sure, we’ve said the CapEx for the year we think will be in the $55 to $65 million range, and in terms of generating cash, we do expect to have a stronger cash flow as we ramp through the balance of the year than we did in 2007. Our 2007 numbers were sort of difficult to sort through just because of the impact of all of the IPO entries in the third quarter, but we do in general in 2008 expect stronger cash flow.

Paul Bard – Renaissance Capital

Great, thanks a lot.

Operator

The next question is from Peter Gingold with Angelo, Gordon & Co.

Peter Gingold – Angelo, Gordon & Co.

Hey guys, my questions were answered. Michael covered most of them, thanks.

Marsha C. Williams

Thank you Peter.

Operator

This does conclude the Q&A portion of the conference call. I would like to turn the conference back over to Mr. Barnhart for any closing remarks.

Steve Barnhart

Thank you Cia. I would like to close by reiterating our confidence that we will deliver improved results each quarter over the balance of the year. Key components of that are as follows. New Orbitz advertising will launch shortly which we expect will be much more impactful than our current advertising. We will launch innovative new functionality in the US that meets the core needs for our consumers and we expect that offering to drive both increased traffic and higher conversion rates. We expect to sustain strong growth in our international businesses while we remain on track to convert to remaining ebooker sites to the new global platform by the end of the year which should support both growth and cost efficiencies in continental Europe. Our advertising sales business, Orbitz for Business, and our White Label business continue their strong growth which improves modernization of our existing traffic and technology. We believe the changes we have made have set the stage for solid sustainable growth that will meet the targets we set out for the long terms. Those targets remain a 9% to 12% increase in worldwide gross bookings and revenue apart from the impact on gross bookings if any material declines in airline pricing, steady modest increases in non-air mix, both as a percent of revenue and as a percent of gross bookings, and lastly an improvement in annual adjusted EBITDA margins increasing to the mid 20s over the next 4 to 5 years. Thank you for joining us today. We will continue to update you on our progress throughout 2008.

Operator

Ladies and gentlemen, thank you for participating in today’s conference call. You may disconnect at this time.

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