Orbitz 2010 Annual Report Download - page 78

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 IT
Group (“Amadeus”). Under our GDS service agreements, we earn revenue in the form of an incentive payment
for air, car and hotel segments that are 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 to
operate our customer service call centers, credit card processing fees, and other costs such as ticketing and
fulfillment, customer refunds and charge-backs, affiliate commissions and connectivity and other 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
expense is recognized based on the terms of the individual agreements, which are generally over the ratio of
the number of impressions delivered over the total number of contracted impressions, or pay-per-click, or on a
straight-line basis over the term of the contract. Offline marketing expense is recognized in the period in
which it is incurred. Our online marketing costs are significantly greater than our offline marketing costs.
Income Taxes
Our provision for income taxes is determined using the asset and liability method. Under this method,
deferred tax assets and liabilities are calculated based upon the temporary differences between the financial
statement and income tax bases of assets and liabilities using the combined federal and state effective tax rates
that are applicable to us in a given year. The deferred tax assets are recorded net of a valuation allowance
when, based on the weight of available evidence, we believe it is more likely than not that some portion or all
of the recorded deferred tax assets will not be realized in future periods. Increases to the valuation allowance
are recorded as increases to the provision for income taxes. As a result of our adoption of updated guidance
issued by the Financial Accounting Standards Board (“FASB”) regarding business combinations, effective
January 1, 2009, to the extent that any valuation allowances established by us in purchase accounting are
reduced, these reductions are recorded through our consolidated statements of operations. These reductions
were previously recorded through goodwill. The realization of the deferred tax assets, net of a valuation
allowance, is primarily dependent on estimated future taxable income. A change in our estimate of future
taxable income may require an increase or decrease to the valuation allowance.
For the period January 1, 2007 to February 7, 2007, the operations of Travelport were included in the
consolidated U.S. federal and state income tax returns for the year ended December 31, 2007 for Orbitz
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ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)