Orbitz 2009 Annual Report Download - page 75

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reservations in advance, at the time of booking. Initially, we record these advance payments as deferred
income and accrued merchant payables. In this model, we do not take on credit risk with travelers, however
we are subject to fraud risk; we have the ability to determine the price; we are not responsible for the actual
delivery of the flight, hotel room, or car rental; we take no inventory risk; we have no ability to determine or
change the products or services delivered; and the customer is responsible for the selection of the service
supplier.
We recognize net revenue under the merchant model when we have no further obligations to our
customers. For merchant air transactions, this is at the time of booking. For merchant hotel transactions and
merchant car transactions, net revenue is recognized at the time of check-in or customer pick-up, respectively.
This timing is different for merchant air travel because our primary service to the customer is fulfilled at the
time of booking.
We accrue for the cost of merchant hotel and merchant car transactions based on amounts we expect to
be invoiced by suppliers. If we do not receive an invoice within a certain period of time, generally within six
months, or the invoice received is less than the accrued amount, we may reverse a portion of the accrued cost
when we determine it is not probable that we will be required to pay the supplier, based on our historical
experience and contract terms. This would result in an increase in net revenue and a decrease to the accrued
merchant payable.
Dynamic vacation packages offer customers the ability to book a combination of travel products. For
example, travel products booked in a dynamic vacation package may include a combination of air, hotel and
car reservations. We recognize net revenue for the entire package when customers use the reservation, which
generally occurs on the same day for each travel product included in the dynamic vacation package.
Under both the retail and merchant models, we recognize revenue for service fees charged to customers
for booking travel reservations. This revenue is recognized at the time we recognize the net revenue for the
corresponding travel product. We also may receive override commissions from suppliers if we meet certain
contractual volume thresholds. These commissions are recognized when the amount of the commissions
becomes fixed or determinable, which is generally upon notification by the respective travel supplier.
We utilize global distribution systems (“GDS”) services provided by Galileo, Worldspan and Amadeus.
Under GDS service agreements, we earn revenue in the form of an incentive payment for each segment that is
processed through a GDS. Revenue is recognized for these incentive payments at the time the travel
reservation is processed through the GDS, which is generally at the time of booking.
We also generate other revenue, which is primarily comprised of revenue from advertising, including
sponsoring links on our websites, and travel insurance. Advertising revenue is derived primarily from the
delivery of advertisements on our websites and is recognized either at the time of display of each individual
advertisement, or ratably over the advertising delivery period, depending on the terms of the advertising
contract. Revenues generated from sponsoring links and travel insurance revenue are both recognized upon
notification from the alliance partner that a transaction has occurred.
Cost of Revenue
Our cost of revenue is primarily comprised of direct costs incurred to generate revenue, including 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 data processing costs. These costs are
generally variable in nature and are primarily driven by transaction volume.
Marketing Expense
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. Online advertising
75
ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)