Orbitz 2009 Annual Report Download - page 46

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more favorable than the terms with our former membership program advertiser. Advertising revenue also
increased as a result of our continued efforts to seek out new opportunities to further monetize traffic on our
websites. Domestic other net revenue further increased due to an increase in travel insurance revenue, driven
primarily by higher attachment rates for travel insurance and more favorable economics resulting from the
execution of a new agreement with our travel insurance provider, which was effective in 2008.
The increase in international other net revenue is due to an increase in travel insurance revenue, and to a
lesser extent, an increase in advertising revenue. The increase in travel insurance revenue is largely due to the
introduction of a new travel insurance product on one of our ebookers websites as well as higher attachment
rates for travel insurance. Advertising revenue increased as a result of our continued efforts to seek out new
opportunities to further monetize traffic on our websites.
Cost of Revenue
Our cost of revenue is primarily comprised of costs incurred to operate our customer service call centers,
credit card processing fees incurred on our merchant bookings, ticketing and fulfillment costs, charge-backs, and
connectivity and other processing costs. Cost of revenue increased $6 million, or 4%, to $163 million for the year
ended December 31, 2008 from $157 million for the year ended December 31, 2007. The increase in cost of
revenue was driven by an $8 million increase in affiliate commissions, a $4 million increase in GDS connectivity
costs, a $3 million increase in charge-backs and a $1 million increase in credit card processing fees, partially offset
by a $7 million decrease in customer service costs and a $3 million decrease in ticketing costs.
The increase in affiliate commissions was primarily due to the growth of our white label business. Higher
transaction volume from our international locations primarily drove the increase in GDS connectivity costs.
The increase in charge-backs was due primarily to an increase in fraudulent credit card usage at one of our
international locations. We have installed new revenue protection software and instituted tighter security
measures, and as a result, we experienced a significant decrease in these charge-backs towards the end of the
second quarter of 2008 that continued through the remainder of the year. Growth in our merchant bookings
resulted in higher credit card processing fees.
Lower domestic transaction volume primarily drove the decrease in customer service costs. Ticketing
costs decreased during 2008 as the industry continued to move towards electronic ticketing to meet the
International Air Transport Association mandate to eliminate paper tickets.
Selling, General and Administrative
Our selling, general and administrative expense is primarily comprised of wages and benefits, consulting
and professional services fees, and data center and network communication costs. Selling, general and
administrative expense decreased $29 million to $272 million for the year ended December 31, 2008 from
$301 million for the year ended December 31, 2007.
During the year ended December 31, 2007, we recorded a one-time exit penalty of $13 million due to the
early termination of an agreement and incurred $8 million of one-time audit and consulting fees in connection with
our IPO and the post-IPO transition period. The absence of these costs in the year ended December 31, 2008
primarily drove the decrease in selling, general and administrative expense. In addition, our selling, general and
administrative expense decreased by $14 million during the year ended December 31, 2008 due to a reduction in
the present value of our liability under the tax sharing agreement, which primarily arose from a reduction in our
effective state income tax rate (see Note 9 — Tax Sharing Liability of the Notes to the Consolidated Financial
Statements). We also recorded an $8 million reduction to selling, general and administrative expense during the
year ended December 31, 2008 compared to a $3 million reduction in the year ended December 31, 2007 for the
insurance reimbursement of costs we previously incurredtodefendhoteloccupancytaxcases,whichalso
contributed to the decrease. Selling, general and administrative expense also decreased $6 million primarily due to
the capitalization of development costs during the year ended December 31, 2008 associated with the launch of our
remaining ebookers’ websites onto the new technology platform in 2008.
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