Sabre Corp (SABR) 2002 Q2 法說會逐字稿

Good morning and welcome to the Sabre Holdings Corporation conference call to discuss the Q2 results for 2002. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the call please press the “*” followed by the “0” on your touchtone phone. As a reminder this conference is being recorded and is being broadcast live over the Internet. I will now turn the call over to Karen Fugate, Director of Investor Relations for Sabre. Thank you. You may begin.

Thank you, Judy. Hello everyone. Thank you for joining us today. I’m here with Bill Hannigan our Chairman and CEO, Eric Speck our Chief Marketing Officer and Jeff Jackson our CFO. Bill will review highlights for the quarter, Jeff will review our financial results in detail and Eric will discuss a new strategic initiative for Sabre.

Before we get started I would like to remind all of your that some of our comments on matters such as our forecasted growth on revenues, earnings, bookings, operating margins and cash flow, potential contracts or business and trend information will constitute forward looking statements. These matters are, of course, subject to a number of factors that could cause actual results to differ materially from our expectations. These factors are described in the Risk Factor section of the Company’s most recent Form 10-Q filing with the SEC. The Company undertakes no obligation to publicly update or revise any forward looking statements.

Now I’ll turn the call over to Bill.

Thank you, Karen. Thank you all for joining us. This morning I’ll discuss Sabre Holdings results for the Second Quarter, our outlook for the remainder of the year, some of the actions we’ve taken to advance our strategy and I’ll also update you on industry developments. And Eric Speck, Chief Marketing Officer for Sabre Holdings will talk about our new Corporate Connect initiative which has implications for two of our business units. This initiative is all about leveraging our leadership position across all channels in travel distribution is very good for Sabre Holdings. Finally, Jeff Jackson will more thoroughly review our second quarter financial results, our business unit results and key metrics and our outlook.

The headlines for this quarter are: Sabre’s earnings per share are inline with projections although we did not see the recovery in travel we had expected. Earnings per share were 57 cents before special items, a 14.9 percent decline year-over-year. On a GAAP basis that’s 47 cents versus 20 cents from a year ago quarter. Second quarter revenues were $533 million down 8.5 percent from one year ago. This was lower than our revenue guidance of down 3 to 8 percent due to the more than expected decline in May and June air bookings and weakness in Travelocity’s revenue. Three of the four Sabre business units had solid revenue and operating earnings results. Travelocity had decent transaction volume, membership gains and improved the book-to-book ratio during the quarter, all meaningful metrics in the online space. However, its average revenue per transaction was lower than we planned for two reasons; the changing commission structure across the industry; and the necessity to compete with the Orbitz pricing scheme. In other words, a rate problem. We also had a mixed problem. Our merchant air product is worth more then three times our agency air product and we didn’t sell nearly enough of it during the quarter. We’ll talk about that.

We believe it’ll take a couple of quarters before Travelocity is back on the kind of upward trajectory we expect as we execute on our initiatives to improve unit revenue as well as margins.

Moving to Sabre’s other financial metrics for the quarter, free cash flow continues to be a highlight. We generated $79 million keeping us on track to achieve our full-year expectation of greater then $220 million. Our EBITDA was $132 million tracking toward our full-year projection of approximately $500 million. And full company operating margin for the second quarter up 25 percent.

Now lets talk about the second half of the year. The recovery of bookings stalled in May-June and the first part of July so based on that we’re adjusting our full-year bookings guidance by about 1 percent to be down approximately 8 percent year-over-year versus our previous guidance of down approximately 7 percent. We’ve taken a great deal of costs out of the business over the past couple of years and we continue to take costs out. However, we do not believe it’s time to further curtail investment in our businesses or products beyond what we’re already doing because we believe the industry will recover and we remain committed to leading the way out.

This brings us to the earnings outlook. Our current EPS projection is $1.93 to $2.03. However, as we said throughout the quarter the dilution caused by our recent equity offering, about 6 cents, and our new agreement with Yahoo, about 3 cents, have been putting pressure on that range. Additionally with the lowering of our bookings forecast and our revised Travelocity forecast, we believe it’s prudent to lower our EPS projections for the year. So for 2002 we project diluted EPS before special items to be in the range of $1.85 to $1.95 versus our previous range of $1.93 to $2.03. For revenue growth we expect to be in the range of negative 3 to positive 1 lower then our previously projected 1 to 5 percent range. For the third quarter our expectations for EPS before special items is between 44 and 49 cents. For the fourth quarter our expectation is between 22 and 27 cents. We may well see it bounce back in travel demand in the second half of the year and if we do we would adjust our projections accordingly.

During the second quarter we executed our strategy in several new ways. We closed the tender offer to buy the remainder of Travelocity in April. This action has already proved valuable as we were able to expand our alliance with Yahoo to create new opportunities across Sabre Holdings. Just two days ago we began migrating Travelocity shopping queries to our new Air Travel Shopping Engine. Some of you know it as ATSE which utilizes the Himalaya platform. Travelocity is the first customer we’re migrating to the new platform. We already have the industry’s best, most accurate shopping capabilities. ATSE takes us to the next level while at the same time significantly lowering our costs.

This quarter we launched the Empowering Agenda for travel agents which is being met with positive response. The Five-Point Plan includes Sabre Exclusives, the first GDS developed merchant mile program for hotels; Sabre Magnify, a suite of revenue management tools for agents and our product offering with FareChase which provides access to all air contact. We plan to add booking capabilities in September based on feedback from our agency customers.

This next bit of news isn’t necessarily a Sabre quarterly highlight but it’s recent, important and clears up some of the industry noise around content. We’ve been saying for some time that our technology produces the lowest fares and most viable itineraries the majority of the time. Last month Consumer Reports advises the most viable itinerary -- excuse me, the most viable fares and itineraries available in the leisure online channel were found on Travelocity. And this week Topaz issued a research report showing that a corporate travel agency using a GDS is the best source of low fares for corporations seeking the lowest fare applicable to the itinerary the passenger can actually use. The bottom line is that Sabre Network, GetThere and Travelocity have the most viable fares for travelers.

Now we’ll spend a few minutes talking about our announcement from this morning. With regards to Sabre’s strategy we’ve always said that the travel industry, our core business model, are evolving. We’ve also said if anyone would drive the evolution it would be Sabre Holdings. This premise has driven us to invest in a portfolio of distribution assets unmatched in the travel industry. A portfolio that is now allowing us to do things our competitors can’t. We believe it’s the right time to lead the industry in a further rationalization of the distribution model and to leverage our strength in the corporate online channel. I’ve asked Eric Speck, our Chief Marketing Officer who most of you know, to tell you about our new corporate connect initiative.

Eric.

Thanks, Bill and good morning everyone. We announced this morning that we’re offering a new pricing structure called Sabre Corporate Connect. This program will let thousands of corporations, including half of the Fortune 200, as well as 450 airlines to enter into a lower priced distribution model for air transactions. It’s our solution to the necessity for airlines, agencies and corporations to find more efficient and straightforward distribution solutions. It’ll provide corporations and agencies with the opportunity to negotiate with airlines for content, discounts and services and it’ll help airlines significantly lower their distribution costs. This offering utilizes the existing Sabre Network eliminating the enormous work process issues and hidden costs for agencies and suppliers that have been associated with other so-called direct connect offerings. The Corporate Connect program is available to all corporate users of the GetThere platform. Through this program corporations using GetThere and their agency of record have the option to enter into a new model that reduces airline distribution costs. The airline will pay a booking fee that is 50 percent below current levels. Under this optional program, and like all other direct connect offerings in the marketplace, the agency and the corporation would forego receiving incentives from their GDS. This program is available immediately and may be implemented at anytime on a per carrier, per corporation basis. No new contract is needed with any of the 450 airlines that participate in Sabre. Now recognizing that some business issues may need to be sorted out between the corporations, their agencies and their airline suppliers Sabre plans to continue to pay incentives to agencies for these bookings in 2002 to ease the economic transition. And beginning in 2003 incentives will be eliminated at the time of implementation.

The key point is that we’re helping our airline customers do something that they’ve wanted to do, reduce their costs and have more predictable costs in the emerging channels of distribution. And we’re helping to improve the already strong competitive position of GetThere which lowers costs for everyone involved. We’ve beaten our competitors to the market by providing a solution that offers the breadth of Sabre’s existing direct connections. It requires no additional technology investment by airlines, agencies or corporations. It’s available now for all carriers. There are no technical implementation matters to sort out which puts tremendous distance between Sabre and the others who are pursuing direct connections. And because it’s incentiveless our Corporate Connect price levels will remain in effect through December 31, 2003. And we expect this new pricing plan to be financially positive for Sabre in 2003 and beyond.

Thanks a lot, Eric.

I’m sure you’d agree that Sabre’s uniquely positioned to rationalize distribution costs and do it in a way that has a positive financial impact. Now we’ll turn to Jeff and we’ll update the financials for the quarter.

Jeff.

Thanks, Bill. The results I’ll review includes some special items we recorded in the second quarter which consists of a one-time gain of $3 million related to the sale of French Telecom shares, a $4 million reversal of a charge we took in December related to facilities and amortization of certain intangibles, stock compensation expense and other transaction fees related to acquisitions all of which total $33 million.

Now let’s look at revenue in further detail. Travel marketing and Distribution had revenues for the quarter of $416 million. That’s a year-over-year decline of 11 percent. The reason for this decline is that total global bookings were down 10 percent year-over-year. Even though we had a real strong April, May and June direct air bookings were worse then planned which had an impact on our revenue.

Further evidence of the stall in the recovery is that our direct transactions were down 12.5 percent in the second quarter which is virtually flat with year-over-year growth of 12.6 percent for direct transactions in the first quarter.

Now let’s turn to Travelocity. During the quarter Travelocity revenues were $75 million. That’s a decrease of 7 percent year-over-year. Transaction revenues were $55 million, a decline of 3 percent. Air transactions was down 19 percent year-over-year and this decline was attributable to a couple of factors. First of all, of course, overall travel market pressures. Secondly, unit revenue decline. This is primarily a result of the airlines taking commissions to zero. Travelocity was compelled to structure new agreements with many of the airlines. Those agreements include ticketing fees from airlines which were less then the prior commission structure but also an opportunity to merchandize and more importantly the opportunity to markup the new air content. This inventory is on the shelf and we just haven’t yet taken full advantage of it.

Moving on to non-air transactions, revenue growth from non-air transactions was 35 percent. This growth was attributable to the revenues associated with the acquisition of Site-59 which has been operating EBITDA positives since we acquired them in March. An increase in hotel sales through our HRN partnership in year-over-year growth in cruise and vacations of 134 percent. Advertising revenue was $12 million for the quarter, down 28 percent from a year ago. This decline was slightly greater then we expected and due to the industry wide slowdown in our online advertising. Other revenue was $9 million, up 9 percent year-over-year. So reflecting the industry dynamics and the need to ramp-up our packaging and merchandising capabilities we are revising full-year revenue guidance for Travelocity to be in the range of 9 to 15 percent.

Now for GetThere. The GetThere business had revenues inline with our expectations of $13 million in the second quarter. That’s growth of 21 percent. Corporate revenue grew by more than 100 percent. In [indiscernible] planned, total revenue growth on a year-over-year basis was dampened by GetThere’s move away from United Airlines, low margins for filament business which occurred a year ago this quarter. Also impacting year-over-year growth was the loss of the TWA business. Even though GetThere continues to have strong results on the corporate side the sluggish business travel demand has contributed to slower revenue growth then we had anticipated. In light of that we are adjusting full-year revenue guidance for GetThere from 40 to 45 percent to 24 to 28 percent.

The airline solution segment which includes the products and services in airline reservations hosting businesses recorded revenues of $52 million for the quarter. That’s 10 percent year-over-year growth. Year-to-date airline solution revenue is up more than 8 percent. Therefore we are rising our full year revenue guidance for this business unit up to 3 to 5 percent year-over-year growth. Even in these challenging times airlines continue to look to Sabre’s airline solutions for revenue and cost optimization tools and the unit continues to sign multi-million dollar deals in all of its lines of business; product sales, hosting and consulting. New wins this quarter included customers such as Air Jamaica, Delta, and British Airways.

Now look to some of the other details in metrics supporting the financial results for the quarter. Starting with [TMND] Bookings. Actual total global bookings process came in at 10 percent down year-over-year. Breaking that down further, U.S. bookings declined 15 percent, International bookings ended the quarter down 4 percent, air bookings were down 11 percent and non-air bookings were down 7 percent for the quarter. As I said earlier direct bookings were down 13 percent which is below our expectations by 1.5 points primarily in the U.S. market.

By channel for the quarter traditional travel agency bookings totaled $95 million, a decline of 12 percent and Sabre online consumer bookings totaled $11 million an increase of 2 percent for the quarter.

Now for an update on share. Year-to-date data for the period ended May indicated that Sabre has lost slightly more than 1 point of share globally but we remain the global leader by far. Our share in North America is down for this period due to pressure in the online channel primarily as a result of the introduction of Orbitz. However, if you were to break the North American channel into online and traditional we gained share in the higher margin tradition channel. Our share percentages by region are as follows: North American, 47 percent; EMEA, 15 percent; Latin America, 51 percent; Asia Pacific, 53 percent for a grand total of 37 percent on a global basis.

Now let me go on to some of the other metrics first starting with Travelocity. Gross travel bookings for Travelocity were $910 million and that’s 4 percent higher then the second quarter last year and it was 16 percent sequential growth. During the quarter Travelocity membership rose by over 1 million to 35 million members, the highest in the industry. Average monthly unique bookers were 672,000 in the second quarter compared to 686,000 a year ago and 613,000 in the first quarter of 2002. And according to industry accepted metrics unique visitors to Travelocity for the month of June, including our portal partners, improved month-over-month beating all traditional competitors. The conversion rate was 5.9 percent which compares to 5.1 percent in the first quarter of 2002.

Now I’ll talk about metrics for the GetThere business. GetThere continues to gain traction due to new customers, momentum with the distributor agreement and increasing adoption with existing customers. During the quarter for the first time GetThere’s total trips exceeded 2 million travelers. Total trips increased 36 percent year-over-year. A significant portion of that growth is attributable to the momentum from our distributive partnership. Corporate trip transactions grew 81 percent year-over-year and 13 percent over last quarter. Supplier trip transactions grew 17 percent year-over-year and adoption rates continue to grow. GetThere recently held their annual customer summit which received high reviews on all fronts. Several large customers stated that they are now around or above 50 percent adoption. Total adoption reached 16 percent and adoption rates for our top 10 customers for the quarter was 49 percent which is 4 points above last quarter’s number.

Now I’ll turn to expenses. Expenses from continuing operations for the quarter were down 15 percent year-over year. This comparison is due to several factors. First, the cost cutting initiatives we implemented late last year, including the cost savings we received through our outsourcing agreement with EDF. Second, lower incentive and data processing expenses due to lower booking volumes and third, lower than planned spending this quarter. All business units were under planned in expenses. Overall we’ve made significant progress on controllable expenses. Cost discipline will continue to be a focus.

Now I’ll provide some additional information on operating income and margin. Operating income from continuing operations excluding special items was $134 million for the quarter. That’s growth of 21 percent over last year. Operating margin for the quarter was 25 percent for the overall business. On a year-to-date basis that puts us 600 basis points ahead of 2001 which goes to our aggressively managing costs in a difficult demand environment.

This improvement is attributable to expense reduction and deferred spending in the second quarter as well as improvement in airline solutions and GetThere margins. Airline solutions reduced operating expenses by more then $2 million and improved operating income by more then $7 million. We still anticipate full-year margins of 10 percent. GetThere reduced operating expense by $6 million. Year-to-date GetThere has cut operating loses in half and this trend is expected to continue. Travelocity incurred an operating loss for the second quarter primarily due to weakness in revenues that I discussed earlier but we do not expect these losses to continue.

A few other comments on the financials. That interest expense -- net income increased year-over-year by $10 million due to the reduction of debt on our balance sheet from $159 million to $410 million. Our cash and marketable securities balance was $893 million. Our EBITDA for the second quarter was $132 million and we expect full-year EBITDA to be about $500 million. Our free cash flow for the quarter was $79 million and we expect full-year cash flow to be greater than $220 million.

I want to make a correction. Our debt was reduced on the balance sheet from $859 million to $410 million.

Before we open up the lines for questions I’d like to talk briefly about our outlook for the second quarter and the remainder of the year.

For the full-year, as Bill mentioned, we revised our full-year revenue and per-share guidance. Earnings per-share is now expected to be in the range of $1.85 to $1.95. Our revised total company revenue projection is negative 3 to positive 1 year-over-year. The revenue range reflects our revised revenue assumptions by business unit.

The business unit year-over-year ranges for 2002 are as follows: Travel marketing and distribution, down 6 percent -- down 3 percent; Travelocity, growth of 9 percent to 15 percent; GetThere, growth of 24 percent to 28 percent. Although I’ll remind you that this reduced range for GetThere, it still includes corporate revenue growth of greater than 100 percent; In airline solutions, growth of 3 percent to 5 percent.

For the third quarter we expect earnings per-share to be in the range of 44 cents to 49 cents and for the fourth quarter we expect earnings per-share to be in the range of 22 cents to 27 cents.

Now I’ll turn it back to Bill.

Thanks, Jeff. I just have a few more comments before we move into the Q and A. First, we’re pleased with the airline solutions business for its significant wins and for exceeding revenue and earnings expectations during a difficult quarter. Secondly, we know we have work to do with Travelocity in terms of improving revenue for transaction and packaging capabilities but I’m confident in the team we have in place and the new level of focus and discipline. The Travelocity is working jointly with other Sabre units to fully leverage our technology and business opportunities. Third, I’m enthusiastic about our Corporate Connect initiative because it leverages our portfolio. Between our GDS and GetThere capabilities we are in a unique position to win. The revenue impact is minimal and the earnings impact is positive. And it’s a pre-emptive strike on the other, so-called, direct connect offerings.

So with that let’s open the line for questions.

Thank you. We will now begin the question and answer session. If you have a question you will need to press the “1” on your touchtone phone. You will hear an acknowledgement that you have been placed in queue. If your question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order that they are received. If you are using a speakerphone please pickup the handset before pressing the numbers. Once again, if there are any questions please press the “1” on your touchtone phone.

Our first question comes from Jim Kissane of Bear Stearns.

Thanks, and hello. Bill, in the announcement today on the pricing for the Corporate Connections would believe some people to believe that you’re pricing power may be deteriorating. Can you comment on that in terms of your core bookings and maybe for Eric, and what’s in it for the corporations and the travel agents to go to this model? It looks like the airlines might say it’s something. It’s not totally clear to me how you benefit, how the corporations and the travel agents benefit.

Thank you.

Thanks, Jim. Yes, let me talk about the pricing power aspect of this announcement. I see no change. What we see is similar to what’s happened in the online leisure space emerging channels. In the corporate channel which is 1 percent of bookings today, heading for 2 percent and hopefully heading towards 4 percent next year we’re setting a more predictable price for the suppliers in an emerging channel. And I believe it puts the energy in the right places specifically. Certainly even though the corporate channels has been a screaming deal for the carriers for sometime when you consider cost and yield, average ticket across all of the GDS -- hello?

No, that was just in my office, sorry.

Okay. The average yield across the whole business is $456 higher, it’s the high-end of the market for an $11 cost. However, we all know that it’s also a pressure point for the suppliers because of what they see as a vicious cycle at the high-end of the market around incentive growth. And certainly one of the drivers of booking fee increases is the increase in incentives keeping in mind that the booking fee increases are typically are led by other airline-owned GDS’s versus Sabre.

But again, the energy in the right place is for the supplier a more predictable price and emerging channel. For the corporate travel agency, a solution leveraging our net worth and a process that is already integrated into their workflows and eliminates the cost for them to have to make technology investments around other -- against so-called direct connects. We already have hundreds of direct connects in place.

For the corporation they’ve been hearing for a couple of years now from their suppliers and our supplier customers that they’re concerned about the booking fee and incentive growth at the high-end of the market and that that’s one of the reasons they were withholding for instance content. My expectation is that the corporations will go back to the airlines and say, okay, the cost is coming down in this market place, what should I expect from a content perspective or other things that certainly airlines offer their corporate customers.

Again, I believe it puts the energy in the right places all around the table. Airline customers are very important to us. Other travel suppliers are very important to us and our intent is to bring this concept to other travel suppliers as well and as well as corporate and corporate travel agencies. All important customers to Sabre when you think about the eco-system of travel distribution.

Eric, do you want to add to that?

The only thing I’d add are just stretched from what Bill summarized, Jim, is that you know these direct connect offerings that others in the industry have been pushing all involve tremendous disruption for the corporate traveler and the agency. Our offering is available for all airlines and it’s fully integrated in that work process so it will save money for agencies regarding visa vie other solutions. It also creates the dynamics for the corporation and the agency to sit down with the airline and say we’re ready to implement this lower fee model and to sort out any business issues between them such as access to content and other issues that are important for them.

And because it eliminates the incentive, it just has a much more straightforward pricing structure where our fee is for the technology services we provide and any compensation issues that are flowing to the corporation and the agency can now just be sorted out direct with the supplier.

Okay. And, Bill, is a couple quarters for turn-around at Travelocity conservative? I mean, is there something structurally wrong here? Are there any quick fixes? Any kind of comment on that?

Yes. There isn’t anything structurally wrong. I think that’s -- when I say a couple of quarters my expectation is that you see pretty positive stuff in Q4 and obviously full year ’03. Certainly in Travelocity we’re dealing with, as I said, both a rate and mix change and the rate change was caused by the fundamental change in pricing and online. Some of those were cards that we were dealt by the owners of Orbitz, but I’m now whining about that that’s just the reality. Travelocity has done better than most, but certainly there’s one that has done even better and we could have done better and we will do better making sure that we have a better mix of, again, merchant air and merchant vacations and merchant hotel. And it’s still too small of a percentage of our actual selling and it’s important to remember that -- and this is on us, it’s not -- we no longer lack the inventory to sell, that problem’s been solved. Now it’s a matter of taking that inventory off the shelf and selling it effectively.

And that’s across all supplier channels?

Yes.

Thanks, Bill.

Our next question comes from Matthew Fassnacht of J.P. Morgan. Please state you question.

Could you elaborate on the parallel between what you did in the corporate channel and what might have to happen in the online travel channel?

Yes. I think that what we did in the corporate channel has already happened in the online channel. That includes the rate adjustment that’s taken place with, you know, again when you have the five biggest airlines in the U.S. setting a price for content and then you either accept it and move on or don’t. I, you know, the government hasn’t taken any action and in lieu of that we need to complete and so that’s what we’re doing. And the good news is that content comes with that price and now it’s a matter of making sure that we’re selling more of it and improving our mix.

Can you talk about ’03 not that you’re obviously not willing to give guidance but could you give us a flavor for what kind of reaction the bottom-line might have to a normal growth rate in the travel market and where that may come out?

No, Matt, I don’t want to talk about ’03 yet but I will -- let me add a little bit to the corporate connect piece of that. We do believe, again, that this is an EBIT positive move for us. On the revenue side as you would expect it can dampen our revenue a bit. So for instance based on our high expectation of growth in the GetThere channel and adoption and certainly this move you would expect to drive adoption as well, which goes to the energy being in the places. On the revenue side the impact over ’03 could be as much as $23 million or approximately 1 percent of revenue. But again, EBIT positive.

Thank you.

Our next question comes from Jennifer Dugan of Merrill Lynch. Please state your question.

Thanks. Can you elaborate a little bit on the loss of domestic markets where you indicated that it was down but not really by how much? And also you indicated that some of that was being lost to Orbitz, but you know, what’s going with you guys versus Expedia? You seem to have the merchant inventory in place but it’s not -- it’s unclear whether it’s really out there in the marketplace or whether you’re really pushing it. I mean, I watch all the advertising and going to the sites very regularly and I just haven’t really seen the merchant model pushed too much so if you could just tell me how you’re going to sort of fight the perception that Orbitz and Expedia have better products than you guys have.

Jennifer, we’ll answer this question in a couple different layers. First is, the market-share loss domestically I think you just think about the mechanics of Orbitz being in place starting about a year ago so it’s dramatic growth in the short-term obviously those bookings go to [World Span]. So that’s been the primary pressure point on our U.S. market-share as well as the growth of Expedia. But more importantly, or as importantly in a balancing factor there the share growth we have gained over the same time period in the online -- on the offline segment that we continue to add to our market-share leadership position in the U.S. and that’s how that plays out.

I think that the second part of your question, Bill, do you want to take that one?

Yes, absolutely. And I would add as well that from a -- in a traditional GDS business, for lack of better words, one of our other competitors has announced and certainly I like our results relatively to theirs but none of us are thrilled with buy-ins in the industry, period. But that was good to see as to where share-shift is and isn’t taking place.

As far as Expedia is concerned, of products concern, you know if Consumer Reports again pointed to the fact that we had the best content at Travelocity, we had the most viable itineraries in Travelocity. That goes to the technology we have in place and instead of throwing a lot of prices at you, throwing prices at you that are low fares that also are pliable, but from a packaging perspective, that is we are behind and we need to catch up and all across is a -- I think Jim’s comment was around all supplier channels and merchant hotel, merchant air and merchant vacations and this is part of what we’re doing to leverage the acquisition of Site-59 and leadership team at Site-59 which has taken on the product responsibilities for all Travelocity in the last few weeks. And again, I expect that we will see the fruits of that.

What do you think the timing of that will be? I mean when you guys [multiple speakers]

You’ll see it in a meaningful way in Q4.

Do you plan -- is there any kind of a new campaign to sort of fight this current perception that your products are not as good as Expedia and Orbitz? I mean if you have you know the Consumer Reports coming out saying you guys are the best, that nobody else seems to think so, I mean how do you specifically plan to fight that perception?

We’re not -- I mean that is not the market perception we’re getting. I mean from Best of the Web, the award from Forbes last month for both Travelocity and Site-59, the Consumer Reports, the Topaz, the market data and the market perception wouldn’t reflect what you’re saying, Jenny. At the same time it doesn’t mean that we’re not going to spend $40 million in our Travelocity ad campaign as we speak to make sure that we’re getting the reach that we want.

Well, I guess I’m referring more in terms of the traffic that you guys are seeing in the traffic on the site at Expedia. I mean, they’re still getting a larger year-over-year growth in traffic than you guys are which would sort of indicate that the actual consumer really isn’t onboard yet with what’s going on in your new product.

That’s actually -- the data I have shows that our traffic out-stripped Expedia in June. Our volume’s considered up, it’s continued to out-strip. It’s all a matter of mix.

Okay, great. Thanks.

Okay.

The next question comes from David Togut of Morgan Stanley. Please state your question.

Thanks. Could you just give us your thoughts on how the new pricing schedule with Corporate Connect will affect your pricing strategy in the bricks and mortar channel? You know, to what extent can you continue to maintain strong price increases in that channel even as pricing comes down in some of the online channels?

Yes. I see no impact in the bricks and mortar channel. This is traditional channel pricing not only in our industry but traditional in many and so I see no impact in the bricks and mortar channel. The interesting thing -- some of the things that are shaking out as we speak and you know to Jenny’s question, I wish I had Sam here to go deeper into some of the specific initiatives at Travelocity but he’s been called to Washington to testify and he’s doing that this morning.

But some of the other things that are interesting that are shaking out, America West you probably saw just a couple weeks ago announcing that it was making -- their making all their fares available through the GDS which again I expect goes to a recognition of reach, high yield, low cost of 61,000 travel agencies. We also have had conversations with one of the majors, that will go nameless, in just the last couple days making sure that we had the capacity in our Fare Filings group to be able to load all of their fares for their corporate accounts as well. So there’s I think real positive energy going in that direction as well around content and availability of content.

To the extent that the bookings environment remains challenging next year, do you have significant additional room to improve the cost structure?

We do have room, David. Obviously we’re hoping that the industry gets out of the doldrums but yes, there is certainly room within our cost structure depending on update continuing to updates exactly where the industry is and where it’s going.

Okay. Thank you.

The next question comes from [Nevin Tekara] of [MFS] Investment Management. Please state your question.

[Nevin Tekara]: My question has been answered, thank you.

Our next question comes from Jay Douglas of [Transco] Capital. Please state your question.

[multiple speakers] remains challenging next year. Do you have significant additional room to improve the cost structure?

We do have room,

[technical difficulty]

Our next question comes from Greg Gould of Goldman Sachs. Please state your question.

Thank you. [multiple speakers]

Are we back? This is a test.

Hi, can you hear me?

Greg, I have you.

Okay, great. On the Corporate Connect could you -- I think you addressed it earlier but just clarify the revenue impact that you see in calendar ’03 from this.

Right. We see a revenue impact in ’03 of -- you know this assumes growth rates, adoption rates, all of those things so we assume $23 million is our planning number right now.

Okay. And help us with the economics -- the good thing is you’re giving up or eliminating the incentives and the fee is going to be lower so if we were looking at a booking fee, what is the difference between the revenue you would have collected net the old way versus the new -- under the new system?

Got you. I will round just a bit for simplicity but I’ll be rounding to the tune of a dime or two. Right now based on the average number of segments that a corporate trip would entail we’re getting in a Sabre -- through a Sabre connected agency $10 in booking fees. This new price point would take that $10 down to $5 keeping in mind, of course, that we’re also getting a trip fee since they’ll get there connected of about $5. So what would have been if they’re connected -- Sabre GDS connected corporate client, instead of getting $15 all in we’re getting $10 all in. We’re also eliminating $4 to $5 in incentives.

Okay. And to follow up on one of the earlier questions, how confident are you that this won’t spill over into the traditional bricks and mortar business? Right now it’s contained in just GetThere, correct?

Absolutely. It’s corporate online channel pricing.

Okay. One last question, you’re -- Jeff, the cash flow from operations target for calendar 2002?

[technical difficulty]

220? Yes, the 220? Are you talking about cash flow or

Yes, I’m sorry. The cash flow from Operations 220?

The free cash flow which is cash flow minus [CapX] is in the -- our target is 220, Greg.

Thank you.

We’ll follow-up to make sure we’re definitionally are talking about the same thing, but it’s our free cash flow number.

Okay, that’s consistent with our model.

Okay.

Our next question comes from Tom Underwood of Legg Mason. Please state you question.

Yes, one Bill. I was just wondering if you could give us an update on how Sabre Exclusives is going and what the adoption rate you’re seeing there is and then secondly, just to follow up a little bit on the commission -- I guess the elimination of the incentives for corporate through online channels, what do you expect in terms of adoption rates and do you have any plan to make adoption essentially mandatory?

We wouldn’t make adoption mandatory but certainly we -- maybe that’s a bad choice of words. I think the energy’s in the right place to drive adoption. Our assumption is that adoption would get as high in our corporate base of 50 percent across the base next year. Right now across the base it’s running at 16 percent but at the high end of the market it is touching on 50 percent for our top 25 accounts.

On Sabre Exclusives we are well ahead of plan because our expectation was to roll it out in July meaning we wouldn’t have anything on the books right now. These numbers are just a tad dated. I think it’s a week or two ago but we currently have over 12,000 travel agencies with access to Sabre Exclusives. We have 41 cities launched, we have over 1,000 hotels under contract, we have about 250, 260 of those 1,000 hotels, just over 1,000 hotels bookable in the system and we’ve sold 3,000 room-nights through last week which is about 3,000 ahead of plan because our expectation was to launch as we speak. Our planning was to get about 120 hours a night in average rate. We’re running right around 115 right now and that’s because out of the gate we’re a little bit more heavily weighted in Las Vegas where typically the average room rate is lower so we’re pretty encouraged by how we’re getting out of the gate.

Okay. What are you seeing for margins on the Exclusive side?

Yes. I don’t know that we’ve talked about the margins yet. We’re [technical difficulty] discount in the mid-twenties so far.

Great. Thank you a lot.

Our next question comes from Rich Powers from J & W [Solomon]. Please state your question.

Hi, guys. I guess when you’re competing with GetThere now with the new incentive structure, are competitors still going to be paying corporate customers an incentive fee and how do you compete against that?

Well, I think there’s a lot of things going on, Rich. One is that there are other direct connect or so-called direct connect initiatives that are being looked at by various travel agency customers that are not integrated in their wordprocessings, etcetera as they try to figure out the best way to go about it in a corporate travel agency -- in the corporate travel agency channel. But I think that again, I believe it’s pretty rational pricing structure that puts energy in the right places for an emerging channel and my expectation is that our traditional competitors will see it the same way. We’ll see how that shakes out. I certainly talked to a competitor or two and many customers in the last several hours.

Okay, thanks.

Our next question comes from Michael [Lorettis] of [Dale] Advisors. Please state your question.

The 220 number you said before, you said that was a free cash flow number?

Right.

How do you define free cash flow?

That income plus depreciation amortization minus [CapX].

Okay. So what is the EBITDA number that correlates the $1.85 to $1.95 of guidance?

$500.

$500.

Okay. Thank you.

Our next question comes from Michael [Milman] of Solomon Smith Barney. Please state your question.

Thank you. You mentioned this earlier when we talked about market share and how one of your competitors had reported and your numbers were better than theirs. Could you talk a little bit about whether you think that competitor is at this point sort of getting it’s act together gearing up, whether it has a full suite and is going to start to become much more competitive? What signs do you see one way or the other way?

I fell pretty good about how we continue to compete with our traditional competitors. The good news is for us is that we not, you know, we not your father’s GDS as far as our product set and the other assets we have in travel distribution and I think that continues to play out.

Are you suggesting they are?

Are what?

It’s your father’s system?

No. I’m not going to speak for them, I’m speaking for us.

Okay, thank you.

Our next question comes from [Michele] Esposito of [indiscernible]. Please state your question. Miss Esposito, please go ahead.

We’ll move on to the next question. The next question comes from Paul Keung of CIBC. Please state your question.

Hi. The first question is China’s in the economics of the corporate direct connect that you have it announced today. You mentioned there’s financial positive impact to 2003, could you just walk through what the negative impact is near-term and give some color on how it comes about?

Yes. I just want to make sure I’m clear there’s a dampening on the revenue-wide which I expect is 1 percent or less. It’s certainly positive on the EBIT line. As far as ’03 is concerned, there’s as much as a penny of pressure on the earnings side because with taking the -- ’02, I’m sorry. In ’02 there’s as much pressure as a penny on the earnings line because in ’02 we are -- you know, if you throw the switch tomorrow, take the booking fee down but our intent is not to shock our travel agency customers and we know that some conversations have to take place between the various players in the ego-system and so that takes place on January 1, 2003.

Okay. So the functions, you’ll still be paying incentives fees up until January 1, ’03 then.

That’s correct, Paul.

Okay. The next question is can you’d give me some color on the pricing strategy next year. You’ve given some color in the past on bundling versus unbundling, what are some areas that you’ll see some unbundling that gives you some price increases because you need to add more services to them, those which probably won’t increase in price?

Yes. I think that, again, we’ve got pretty predictable pricing in pace in the online leisure channel and we’re rolling out more predictable pricing in the corporate online channel. I can see no change in our pricing strategy in the traditional channel. I think as far as -- I assume, Paul, you’re talking about the unbundling of the travel agency contracts which has been an initiative underway for some time here and that will continue. We currently have just about 1500 unbundled contracts in place that’s certainly, that’s the lion’s share of the high-end of the marketplace.

But that unbundling process doesn’t affect us, it’s not related to pricing that has an impact, in fact a very positive one in our expense line.

Okay. I mean, [indiscernible] reduce your incentive fees then, is that the intention?

In the corporate online channel, yes.

Again, I think it’s real important there are bright lines between the various channels. There’s corporate online, which will have a specific booking fee and incentive structure or lack thereof and then there’s tradition travel agency, no change in pricing structure or competitive structure and then again, leisure online.

And the last thing, on Travelocity. Just give me some color on where you’re going to target now the mix of that the transaction revenues, merchant versus non-merchant. I think the last update we got was 25 [indiscernible] transaction [indiscernible] of merchant. What is it now and where do you expect it to be by year end?

We’re still sticking with that one. I mean for the quarter it was 19 percent. Now the 19 percent does include the warrants from HRN and a little bit -- there’s also some contributions from Site-59 which is an EBITDA positive since we acquired Site-59. The challenge is; a. to get that up, b. to make sure we take advantage of the inventory that we have available to us now in merchant air because merchant air is still running in the low single digits and that’s where the majority of our energy is right now to crank that up because that is, again, inventory worth three-fold compared to what we call agency air or published air.

Okay. Thanks a lot.

We’ll take one or two more questions and then we got a couple closing comments.

Our next question will come from Jim Kissane of Bear Stearns. Please state your question.

Thanks. Just a quick follow. Bill, do you have any sense that corporate bookings are leaking onto the consumer channels to take advantage of lower prices and are the airlines doing anything to counter that and can you kind of walk through how maybe you can help the suppliers protect price while still offering a decent value to the consumer.

Absolutely and I commented on a couple things. Certainly what we’re talking about here, Jim, is that in rationalizing pricing at the high-end of the corporate market, which is already high yield it relieves a pressure point on what is seen by the other suppliers as a vicious cycle at the high-end where a great deal of the incentive is. We talked about before our incentive being well below $1 on average. But obviously based on numbers I just rolled out it’s significantly larger than that at the high-end of the market. I think that the other things I mentioned were America West, which is out there now with their communication that they’re making all fares available through GDS. Certainly the Topaz study that just came out a couple days ago confirms more of that, that the best fares, the best itineraries are now available on the GDS. I think that what isn’t happening in Orbitz over the last several months ought to be a reflection of this as well where it seems to be a pull-back on web fares as airlines are very focused on improving their yield and also I alluded to earlier that one of the major carriers that contacted us in the couple days to make sure we’re prepared for their fare filings, to make sure that all fares are available to their corporate customers. And so I think that a lot, again, a lot of the momentum is in the right direction in an understanding of yield, cost, reach, multiple channels and how all customers are impacted.

So the merchant model does not result in [disincumutiation] of Sabre?

No, I do not see it that way. No. Now, one of the things that we didn’t mention was there certainly has been some noise in the market place of some of our competitors getting into the corporate space. And certainly, we like our position a lot in the corporate space. We already have what we call a pincher strategy in place between Travelocity at the low-end of the market by 37 percent of our bookings and unmanaged business, at the high-end of the market, unquestionable leadership; unquestioned leadership with GetThere in the highly managed space. And the next strategy, the next piece I think you’ll be seeing more from us in the future is the lightly managed medium small business traveler. Which is, you know, that’s a tougher nut to crack but we’re all concerned typically because of direct sales force, market coverage, etcetera, but I certainly like our position in what I call -- we call our pincher strategy.

We’re running over, unfortunately. We’re going to get disconnected. They’re going to turn our bridge off.

Let’s just take one more question and then we’ll wrap it up.

Our last question today will come from Matthew Fassnacht of J. P. Morgan. Please state your question.

It sounds like the booking production’s going to be a good move to suspend the tide of direct connect. Do you think it’ll be sufficient enough to make the airlines not pursue those efforts and interrelates to the lightly managed business solution? Is that another channel, perhaps, where you’d see this kind of advantage booking fee for the airlines?

No, I see the way we managed channel differently but as far as the -- as far as where the suppliers chose to invest certainly that’s up to them but there’s been a lot of, again, a lot of noise in the market place about booking fees and incentives at the high-end of the corporate market. And certainly there have been a couple competitors with possible competitors out there talking about price points in the market. This feels awful preemptive to me and so we’re pretty excited about that and the fact that we’re able to do that with our assets mix and have it be positive for our shareholders.

We are out of time. Thank you for joining us today. We appreciate your questions. Let me stress that Sabre’s executing on our [indiscernible] metrics including free cash flow, we have a strong balance sheet, we still believe it’s a very important time to have a strong balance sheet and even in a difficult environment we’re expanding or expecting 8 to 13 percent earnings growth for the year. Our industry certainly is volatile but we continue to be committed to focusing on the next [indiscernible] industry leadership and long-term growth.

Thank you again.