Orbitz 2009 Annual Report Download - page 51

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increase is primarily attributed to an increase in travel insurance revenue, driven by higher air and dynamic
vacation package volume, and to a lesser extent, higher net revenue per transaction. Domestic other net
revenue further increased due to an increase in advertising revenue. The decrease in international other net
revenue is primarily attributed to the sale of our offline U.K. travel subsidiary in July 2007 due to the
inclusion of seven months of net revenue from that business in 2007 as compared to a full year in 2006.
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 costs, charge-backs, and connectivity
and other processing costs. Cost of revenue increased $44 million, or 39%, to $157 million for the year ended
December 31, 2007 from $113 million for the year ended December 31, 2006.
The increase in cost of revenue was driven by a $31 million increase in customer service costs, a
$7 million increase in charge-backs and a $6 million increase in credit card processing fees. Higher domestic
and international transaction volume, coupled with the opening of additional call centers, primarily resulted in
higher customer service costs during the year ended December 31, 2007. The increase in charge-backs was
due primarily to an increase in fraudulent credit card usage at one of our international locations during 2007.
Growth in our merchant bookings resulted in higher credit card processing fees.
Selling, General and Administrative Expense
Our selling, general and administrative expense is primarily comprised of wages and benefits, consulting
and professional services fees, and system maintenance and network communication costs. Selling, general
and administrative expense decreased $2 million to $301 million during the year ended December 31, 2007
from $303 million for the year ended December 31, 2006. 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.
These expense increases were more than offset by a $16 million decrease in our wages and benefits, a
$3 million decrease in our facilities expense, a $3 million decrease resulting from insurance reimbursements
received and a $1 million decrease in other operating expenses. The decrease in wages and benefits was
primarily due to the sale of our offline U.K. travel subsidiary in July 2007 (due to the inclusion of seven
months of expense from that subsidiary in 2007 as compared to a full year of expense in 2006) and an overall
reduction in head count at our international subsidiaries during 2007. The decrease in facilities costs is
primarily due to a decrease in rent expense as a result of the relocation of our corporate office, and to a lesser
extent, a reduction in our office space leased in the U.K. We recorded a $3 million reduction to selling,
general and administrative expense during the year ended December 31, 2007 for the insurance reimbursement
of costs we previously incurred to defend hotel occupancy tax cases. No such reimbursements were received
in 2006.
Marketing
Our marketing expense is primarily comprised of online marketing costs, such as search and banner
advertising, and offline marketing costs, such as television, radio and print advertising. Our investment in
online marketing is significantly greater than our investment in offline marketing. Marketing expense increased
$25 million, or 9%, to $302 million for the year ended December 31, 2007 from $277 million for the year
ended December 31, 2006.
Domestically, our marketing expense increased $13 million, to $226 million for the year ended
December 31, 2007 from $213 million for the year ended December 31, 2006, which was primarily driven by
an increase in online marketing costs. Our online marketing costs increased largely due to the growth in
transactions sourced through online channels as well as an increase in the cost of key words which we bid on
to drive customers to our websites. Internationally, our marketing expense increased $12 million, to $76 million
for the year ended December 31, 2007 from $64 million for the year ended December 31, 2006, which was
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