Orbitz 2008 Annual Report Download - page 55

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deferred revenue write-off for the year ended December 31, 2006 due to purchase accounting adjustments, cost of revenue would have been 14% of net revenue
in 2006. The increase in cost of revenue was driven by our increased domestic transaction volume, primarily from dynamic packages and hotels. Partially
offsetting this increase was $11 million of cost reductions due primarily to customer service and fulfillment outsourcing and off-shoring efforts.
Selling, General and Administrative
Selling, general and administrative expense increased $10 million, or 3%, to $303 million for the year ended December 31, 2006 from $293 million for the
year ended December 31, 2005. Labor-related expenses, including internal wages and outside services, increased by $27 million, primarily as a result of
increased staff levels to support our growth in operations, including $9 million for the full-year impact of ebookers activity. We also incurred $5 million in
additional expenses related to the development of our global technology platform. These cost increases were partially offset by a $22 million reduction in costs
related to one-time integration expenses incurred in 2005 following the acquisition of Orbitz and ebookers by Cendant.
Marketing
Marketing expense increased $53 million, or 24%, to $277 million for the year ended December 31, 2006 from $224 million for the year ended
December 31, 2005. The increase in marketing expense was primarily due to higher online marketing costs, expanded advertising campaigns promoting our
Orbitz brand and the full-year impact of ebookers.
Depreciation and Amortization
Depreciation and amortization decreased $23 million, or 29%, to $55 million for the year ended December 31, 2006 from $78 million for the year ended
December 31, 2005. The decrease in depreciation and amortization expense resulted from the acceleration of depreciation in 2005 related to the reduction in
estimated useful lives of certain assets as a part of the integration of CheapTickets and Orbitz.
Impairment of Goodwill and Intangible Assets
Impairment of goodwill and intangible assets declined $278 million, or 70%, to $122 million for the year ended December 31, 2006 from $400 million for
the year ended December 31, 2005. These impairments primarily related to a decline in ebookers' fair value relative to its carrying value. This decline was the
result of ebookers' poor operating performance following its acquisition by Cendant due to various operational issues.
Interest Expense, Net
Interest expense increased by $5 million, or 23%, to $27 million for the year ended December 31, 2006 from $22 million for the year ended December 31,
2005. Interest expense increased primarily as a result of imputed interest on the tax sharing liability (see Note 8—Tax Sharing Liability of the Notes to
Consolidated Financial Statements). For the years ended December 31, 2006 and 2005, $27 million and $22 million of the total interest expense recorded was
non-cash, respectively.
Provision (benefit) for Income Taxes
We recorded a provision for income taxes of $2 million for the year ended December 31, 2006 as compared to a benefit from income taxes of $42 million
for the year ended December 31, 2005. Although we incurred a pre-tax loss for the year ended December 31, 2006, these losses were primarily
48
Source: Orbitz Worldwide, In, 10-K/A, August 28, 2008