Orbitz: merchant program delivers 33% of hotel bookings

February 11, 2004 |

Orbitz, Inc. today announced results for the fourth quarter and full year 2003, including strong growth in its merchant hotel business.

For the quarter ended Dec. 31, 2003, net revenues increased 35 percent to $69.7 million from $51.5 million for the fourth quarter of 2002. The company reported a fourth quarter 2003 net loss of $14.6 million, or 40 cents per pro forma diluted share, which includes $26.5 million of expected non-cash compensation charges relating to an April 2002 restructuring of Orbitz’ outstanding stock options. These charges were recorded following Orbitz’ initial public offering (IPO) in December 2003. Because the restructuring is non-recurring, management believes that excluding the resulting non-cash charge is more representative of the company’s performance. Excluding this non-cash charge of $26.5 million, fourth quarter 2003 net income would have been $11.9 million, or 30 cents per pro forma diluted share. In the fourth quarter of 2002, Orbitz reported net income of $3.8 million, or 10 cents per pro forma diluted share.

“As a newly public company, it is gratifying to report a strong quarter and year,” said Jeff Katz, chairman, president and CEO of Orbitz. “Fourth quarter revenues grew 35 percent, gross bookings climbed 34 percent and the fast-growing Orbitz Merchant Hotel program is now more than a third of our hotel revenues, just 10 months after its launch. Excluding the non-cash charge—which we think is the best way to evaluate our performance—Orbitz has become solidly profitable, with net income in each of the last two quarters and strong cash flow from operations in each of the last five quarters. Excluding the non-cash charge, Orbitz also was profitable for the full year 2003.

“In just 2-1/2 years, Orbitz has become one of the top three travel sites on the Internet based on gross bookings,” Katz said. “We have become widely accepted as having a leading air travel offering and customer care program. In addition, we are particularly pleased with the success of our recent diversification from air into other travel areas—such as hotels, cars and vacation packages. Hotels are one of our fastest-growing product offerings. We currently have contracts with more than 7,000 properties through the Orbitz Merchant Hotel program, and our customers can book rooms at more than 45,000 hotel properties worldwide through this and our other hotel programs.

“We plan to build on our momentum by improving our merchant hotel offering, dynamic packaging product and corporate travel business,” Katz said. “We also plan to launch our attractions and services offering in the first half of this year.”

Fourth Quarter 2003 Highlights

Gross bookings and revenues. For the fourth quarter of 2003, Orbitz’ gross travel bookings increased 34 percent to $926.5 million versus $690.6 million in the same period of 2002. Net revenues increased 35 percent to $69.7 million from $51.5 million for the fourth quarter of 2002, reflecting growth in each of Orbitz’ three revenue categories:

- Air revenues. Air revenues increased 31 percent to $45.0 million for the fourth quarter of 2003 from $34.4 million for the same period of 2002. Revenues benefited from higher transaction volume, a $1 increase in per-ticket service fees and a $3.8 million increase in air revenues due to the timing of recognition of incentive fees paid to Orbitz by Worldspan, which we received in the third quarter of 2002. Orbitz also experienced strong growth in its Supplier Link program, which accounted for 41 percent of transactions in the fourth quarter of 2003 versus 14 percent for the fourth quarter of 2002.

- Other travel revenues. This category includes hotel, car, vacation packages and cruise revenues. Other travel revenues rose 49 percent to $15.9 million for the fourth quarter of 2003 from $10.7 million for the fourth quarter of 2002, which included a $3.3 million one-time payment from a hotel travel partner. The increase was largely driven by the Orbitz Merchant Hotel program, which accounted for more than 33 percent of hotel revenues in the fourth quarter of 2003, versus zero percent in the same period of 2002. Under the Orbitz Merchant Hotel program, launched in March 2003, Orbitz negotiates rates with hotels for room inventory. Typically, rooms sold under the program generate significantly higher per-transaction revenues for Orbitz than hotel rooms sold using other methods.

- Other revenues. This category includes advertising revenues and airline website hosting revenues. Other revenues grew 35 percent to $8.7 million for the fourth quarter of 2003 from $6.5 million for the fourth quarter of 2002.

Gross profit and cost of revenues. Gross profit increased 53 percent to $53.1 million for the fourth quarter of 2003, versus $34.8 million in the same period of 2002. Contributing to the improvement was both a higher revenue base and a lower cost of revenues. Cost of revenues was $16.6 million for the fourth quarter of 2003, compared with $16.7 million for the same period of 2002. The decrease in cost of goods sold was due in part to a reduction in a credit card fraud reserve, lower rebates of reservation system booking incentives to air suppliers as volume shifted to Orbitz’ Supplier Link program, and declining per-transaction travel fulfillment costs.

Operating expenses. Reported operating expenses were $68.0 million for the fourth quarter of 2003, compared with $31.2 million for the same period of 2002. Excluding the non-cash charge of $26.5 million, operating expenses were $41.5 million, a 33 percent increase from 2002 levels. In order to continue building brand awareness and growing its base of 21 million registered users, Orbitz increased its sales and marketing expense 48 percent to $27.2 million for the fourth quarter of 2003 from $18.3 million for the year-earlier period.

Balance sheet and capitalization. Orbitz’ cash position was $173.9 million at Dec. 31, 2003, compared with $56.0 million at Dec. 31, 2002, primarily due to $95.4 million in net proceeds from the company’s IPO in December 2003 and cash generated from operations.

Other Fourth Quarter Highlights

- McDonald’s chose Orbitz for Business as its exclusive travel provider, making Orbitz for Business the first online agency to be selected by a Fortune 150 company as agency of record.

- Continuing Orbitz’ leading position in innovative travel shopping tools, the company launched its trademarked dynamic packaging matrix to enable users to compare multiple flight-and-hotel combinations at a glance, facilitating the creation of customized packages involving air, hotel and other products in one transaction at one bundled price.

- Orbitz introduced DealDetector, a personalized search tool that automatically alerts users to the latest airfare deals and provides complete information about flight availability and total pricing.

- The company announced that Orbitz was ranked No. 1 in online customer experience in the 2003 Online Customer Respect Study of Airline, Travel and Hotel/Resort Casinos, conducted by the independent Customer Respect Group.

- Orbitz continued to rank among the top three Internet travel sites in terms of site traffic. In December, orbitz.com had the most unique visitors of any major U.S. travel site, according to comScore Media Metrix.

Full-Year Highlights

Gross bookings and revenues. Orbitz’ gross travel bookings increased 34 percent to $3.44 billion for 2003 versus $2.57 billion for 2002. Net revenues climbed 38 percent to $241.8 million for 2003, compared with $175.5 million for 2002.

- Air revenues. Air revenues increased 19 percent to $158.9 million for 2003, versus $133.9 million for 2002, benefiting from a 20 percent increase in transaction volume and a $1 increase in per-ticket service fees. Supplier Link transactions represented 33 percent of transactions in 2003 versus 4 percent in 2002.

- Other travel revenues. Other travel revenues climbed 120 percent to $51.2 million for 2003 from $23.2 million for 2002, primarily due to the introduction of the Orbitz Merchant Hotel program, which accounted for more than 20 percent of total hotel revenues in 2003 versus zero percent in 2002.

- Other revenues. Other revenues rose 73 percent to $31.8 million for 2003 from $18.4 million for 2002, primarily due to increased advertising and hosting revenues.

Gross profit and cost of revenues. Gross profit for 2003 increased 70 percent to $171.7 million from $101.1 million for 2002. Cost of revenues declined to $70.1 million for 2003 from $74.4 million for 2002 due to a reduction in the credit card fraud reserve, lower rebates of reservation system booking incentives to air suppliers as volume shifted to Orbitz’ Supplier Link program, and declining travel fulfillment costs per transaction.

Operating expenses. Reported operating expenses for 2003 were $188.6 million, compared with $119.9 million for 2002. Excluding the non-cash charge of $26.5 million, 2003 operating expenses were $162.1 million, a 35 percent increase from 2002. In order to continue building brand awareness and growing its user base, sales and marketing expense was $110.6 million for 2003, a 52 percent increase from $72.9 million for 2002.

Net income (loss). The company reported a 2003 net loss of $16.0 million, or 46 cents per pro forma diluted share, compared with a net loss of $17.9 million, or 53 cents per pro forma diluted share, for 2002. Excluding the non-cash charge of $26.5 million, 2003 net income was $10.5 million, or 26 cents per pro forma diluted share.

Outlook for 2004

For the full year 2004, Orbitz expects to achieve:

- Revenue of $320 million to $340 million.

- Adjusted pre-tax income of $50 million to $60 million, excluding IPO-related stock-based compensation charges of approximately $5.6 million(4); adjusted pre-tax diluted earnings per share of $1.14 to $1.36.

- Reported pre-tax income of $44 million to $54 million; reported pre-tax diluted earnings per share of $1.00 to $1.23.

- The company expects weighted average 2004 diluted shares outstanding of approximately 44 million, including outstanding options calculated via the treasury method and treating convertible preferred stock on an as-converted basis.

- The company does not expect to pay taxes in 2004.

For the quarter ending March 31, 2004, Orbitz expects to achieve:

- Revenue of $68 million to $70 million

- We expect revenues to be close to fourth quarter 2003 levels, primarily due to the timing variation in booking incentive fees from Worldspan.

- Adjusted pre-tax income of breakeven to $2 million, excluding IPO-related stock-based compensation charges of approximately $1.4 million; adjusted pre-tax diluted earnings per share of $0.00 to $0.05.

- In addition to lower revenues due to Worldspan timing issues, seasonally higher marketing expenditures will impact profitability in the quarter.

- Reported pre-tax income of $(1.4) million to $0.6 million; reported pre-tax diluted earnings per share of $(0.03) to $0.01.

- The company expects first quarter weighted average diluted shares outstanding of approximately 43 million, including outstanding options calculated via the treasury method and treating convertible preferred stock on an as-converted basis.

- The company does not expect to pay taxes in the first quarter of 2004.

Due to historical seasonal travel patterns, continued improvements in our merchant hotel, dynamic packaging and corporate business, and the introduction of our attractions and services business, we expect to see increased levels of profitability in the second half of 2004.