Sabre Corp (SABR) 2002 Q3 法說會逐字稿

Good Morning and welcome to Sabre holdings corporation conference call to discuss the third quarter 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 any one 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.

Hello, everyone. Thank you for joining us today. I'm here with William Hannigan, our Chairman and CEO; and Hugh Jones, our Controller. Bill will review highlights for the quarter, and Hugh will review our financial results in detail. Before we get started, I would like to remind all of you that some of our comments on matters, such as our forecasted growth in 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 Factors 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 statement. Now, I'll turn the call over to Bill.

Thank you Karen, and thank you all for joining us. This morning, I'll discuss Sabre Holdings results for the third quarter, updates on recent business activity, and the outlook for the remainder of the year. As a reminder, we'll provide 2003 guidance next month. Then, Hugh Jones, our Controller, will more thoroughly review third quarter financial results. My co-host for the previous 11 quarters, Jeff Jackson, is under the weather. Of course, he is also tough; so he is here. We just want to save what's little left of his voice for the Q and A. For the third quarter, Sabre's earnings per share were in line with our projections, despite the continued stall in the travel industry. Earnings per share were 46 cents before special items, an 18 percent increase year over year. On a GAAP basis, that's 40 cents versus 42 cents from the year ago quarter. Third quarter revenues were $511 million, down 2.7 percent from one year ago. This was in line with our expectations as well. So eventhough the industry's demand problem continues to weigh on all four of our companies, we continue to manage costs aggressively. Later on, Hugh will update business units' specific guidance. On the revenue front, you will hear that we will be adjusting downward full-year revenue guidance for a couple of our businesses; but that we will -- that we still expect to be in the range for the entire enterprise for the full year. You will also hear that we'll be holding our -- to our earnings range for the year. Actually, we still expect to make or be within a percentage point of our original board approved operating earnings number for the full year across Sabre Holdings. As a matter of fact, on the aggregate level, the three wholly-owned companies that we had coming into the year -- TM&D, Airline Solutions, and GetThere -- are expected to be come in at about 110 percent of their original operating earnings plans. And the right things are happening at Travelocity, but more on all of that in a few minutes.

You shouldn't come away from what I just said with an expectation that we're starving our businesses to make earnings plan. All of our companies are number one or two in their space, and we fully expect those positions to do nothing but strengthen during these lousy period in our industry's history. In other Sabre financial metrics for the quarter, free cash flow continues to be a highlight. We generated $71 million putting us on track to achieve greater than 250 million for the year. Our EBITDA was 116 million bringing us to a full-year expectation of greater than 450 million. And full company-operating margin, excluding special items, for the third quarter was 20 percent. During the third quarter, we saw strength in the Sabre businesses on several fronts. Airline Solutions once again had strong revenue during a tough time in the airline industry confirming the value of our products and services. Year over year comparisons are a bit difficult, because last year's third quarter included significantly increased billings to American Airlines for the TWA integration; but we continue to see strong margin growth in this business, and the sales and implementation pipeline is full. Sabre marketing and distribution -- our GDS business [AUDIO GAP] expectation with transactions down 4.7 percent year over year. That expected, we began seeing positive growth with the anniversary effect of 9/11. GetThere's revenue was up 22.9 percent year over year and is still on track to cut operating losses in half. We're also pleased that GetThere continued to set records in the corporate booking volumes and adoption rates. We continue to grow corporate revenue by 100 percent; and earlier this week, GetThere signed a new three-year agreement with United Airlines, our largest airline website customer. Travelocity's revenues were $83 million, an increase of 5.8 percent year over year. While the Travelocity e-commerce engine, as measured in traffic and conversion rates, is strong, we're also about driving stronger revenue and earnings in the future. Work is underway. Improved points in the third quarter include: Site59 [indiscernible] 306 percent year over year revenue growth and 33 percent sequential growth, substantial improvement in the merchant hotel mix through our Hotels.com relationship, and signification car volume improvement after the implementation of Sabre's total pricing capabilities. And you'll see further improvements in the coming months as we implement several new capabilities such as the launch of Travelocity's own hotel merchant model content to be available by the end of the month. We will launch with somewhere around 750 hotel properties and the system growing to about 2,000 by year end. Improvements in the air booking path with the availability of more flight options and leg by leg shopping is scheduled for rollout later this quarter. And enhanced packaging capabilities extend well beyond our successful last minute deals and vacations businesses to be rolled out in the second quarter of 2003. In the technology area we achieved a milestone with the initial migration of our massive air pricing application to an open systems platform. ATSE or our air travel shopping engine is a multi-year program to migrate air pricing schedules and availability.

Now, let's talk about the remainder of the year. We updated full year guidance on our second quarter call and we're reiterating that guidance. For diluted EPS, we projected a range of $1.85 to $1.95 and remain comfortable with a low end of that range. For revenue growth, we continue to expect to be in the range of negative 3 to positive 1 percent. For the fourth quarter, our EPS expectation is between 20 and 25 cents versus previous projections of 22 to 27 cents but again within our full year range.

Before I hand it over to Hugh, I wanted to talk a little bit about the industry. Let's spend a minute on 2003 GDS pricing. I'm not talking about the pricing model; I'm talking specifically about 2003 and 2003 pricing actions. Typically, at this time of year, one of the things we work on is next year's pricing. This year is no different. There are a couple of things on our dashboard; however, that are different from any other year. I don't expect that many on this call anticipated the industry's rebound to stall as it has. I know we didn't. Our US-based airline customers alone are projected to lose about $8 billion this year. That's several hundred million more than last year. As a reminder, booking fees are only about 2 percent of the price of an airline ticket, and an airlines burden becomes even less with the more seats they sell through the traditional travel agency channel, which we enabled with our GDS business. It continues to be the lowest-cost highest-human channel available to a network carrier, especially, in a zero-based commission world. As a matter of fact, the average ticket price sold through Sabre Travel Agency is $432 at an all-in cost of $11. While our tickets sold through orbits, for example, has an average yield we estimate to be about $260 with an all-in cost of approximately $13. Now, let's talk about what we affectionately call the Washington Factor. It's easy to argue that the government agency with jurisdiction over the travel industry is not stepping up as it should, such as moving out in a timely fashion on the obvious and competitive effects of orbits; and this is just one example how government or government policy can affect us and our industry either positively or negatively. The GDS portion of our business is regulated. So while our model hasn't changed, we need to be very thoughtful as a regulated company by the ramifications of a price increase next year even if it is only 3 to 5 percent not 2 percent. Because were in an environment where taxpayers have already written huge checks and will likely be asked to do so again. You know, labor is being asked to step up and make major concessions. So with the economic and political reality is being what they are, we will need to keep Washington as well as the health of the industry in mind when it comes to 2003 GDS pricing, at least in this region of the world. Having said all that, we'll also be cognizant of the fact that our airline-owned GDS competitors typically announce pricing first and those price increases can be turned right back around and used against us on the agency incentive front to retain or acquire agency points of sale. If indeed we were not to raise prices in 2003, it is logical to assume incentive growth will need to be throttled. As we've said, we'll communicate our 2003 outlook on a call in November. And certainly, our pricing decision will have an impact on how aggressive we are in the area of cost reductions. Now, I'll turn it to Hugh, who will update you on the financials for the quarter. Go ahead, Hugh.

Thanks Bill, and good morning everyone. The results I'll review exclude amortization of certain intangibles and stock compensation expense related to acquisitions totaling $16.2 million. Now turning to revenue, travel marketing and distribution had revenues for the quarter of 390 million, a year over year decline of 3 percent. This is due primarily -- due to primarily a 5 percent decline in total global bookings. As anticipated, September revenue growth was positive due to the anniversary effect of September 11th. We are maintaining our full year revenue growth projections for TM&D at negative six to negative three percent, as well as our full year bookings forecast of down 8 percent year over year. Now, lets turn to Travelocity. During the quarter, Travelocity revenues were 83 million, an increase of 6 percent year over year. Travelocity continues to perform on key metrics, such as conversion rates, membership and transactions. However, its dependency on low margin airline agency revenue continues to dampen overall revenue growth. Transaction revenues were 59 million, an increase of 7 percent year over year. Breaking that into air and non-air, air transaction revenue was down 12 percent year over year. Despite the fact that Travelocity had decent transaction volume, its average revenue per transaction was lower than we had planned coming into the year for two reasons we've discussed before; the change in commission structure across the industry initiated in Q1, and the necessity to compete with the Orbit's [ph] pricing scheme initiated in Q2. In other words, a rate problem. We also had a mix problem. Our merchant air product is worth more than three times our agency air product, and we didn't sell enough of it during the quarter. Initiatives underway to rectify this situation are the highest priority at Travelocity. Significant progress was made last quarter and will be made this quarter to improve the situation, and we expect meaningful revenue growth as a result of these efforts in 2003. Moving on to non-air transaction, revenue growth was 47 percent beside 59 and 33 percent sequential growth and 306 percent growth year over year. Hotels.com volumes were up 132 percent year over year. Cruise and vacations grew 54 percent. Advertising revenue was 13 million for the quarter down 13 percent from a year ago, which is a meaningful improvement from prior quarters. The current and future focus on merchandising will minimize our dependency on advertising sales over time. Other revenue was 11 million, up 31 percent year over year. We expect pressure in other revenue in the coming months due to a decline in ticket delivery requests as airlines continue to push ticketless travel. We've been saying that it would take a couple of quarters before Travelocity was back and the kind of upper trajectory we expect. Revenue performance in the third quarter was below our expectations, and we expect fourth quarter to be similar to the third quarter in terms of revenue. As a result we are revising full year Travelocity revenue guidance to 3 to 7 percent growth versus 9 to 15 percent year over year. Now, for GetThere; the GetThere business had revenues in line with our expectations of 14 million in the third quarter, an increase of 23 percent. Corporate revenue grew more than 100 percent year over year; however, the growth rate remained below our internal expectations. In light of that and coupled with the slower than planned growth in the supplier website business, we are adjusting full year revenue guidance for GetThere from 24 to 28 percent to 20 to 24 percent growth year over year. The airline solution segment, which includes the product and services in airline reservations hosting business recorded revenues of 50 million for the quarter, a decline of 12 percent year over year. This decline is primarily due to the comparison to a strong third quarter last year that included increased billings to AA for the TWA integration. Last quarter, we increased revenue guidance because the first half of the year was strong. However, it seems the timeframe to close deals has begun to stretch, which means we will close on fewer deals in the fourth quarter than the expected. Airlines continue to have an appetite to spend on IT and the sales pipeline is strong, but we believe it's prudent to lower full year airline solutions revenue guidance from 3 to 5 percent to 1 to 3 percent growth year over year. The fundamentals of the business are strong and airline solution continues to show improvement in year over year earnings and margin growth.

Now, I'll move to the details and metrics supporting the financial results for the quarter. Starting with TM&D bookings, total global bookings process came in at 5 percent down year over year. Breaking that down further, US bookings declined 8 percent; international bookings ended the quarter virtually flat. Air bookings were down 5 percent, non-air bookings were down 1 percent for the quarter, and direct bookings were down 7 percent. Looking at the bookings breakdown by channel for the quarter, bookings for the traditional travel agency channel totaled 85 million, a decline of 7 percent for the quarter. Online consumer bookings totaled 11 million, an increase of 5 percent for the quarter. Corporate online bookings were 2 million, growth of 78 percent. Now, an update on booking share. Our share percentages for August year to date by region are as follows: North America 47 percent, EBA 14 percent, Latin America 51 percent, Asia Pacific 54 percent for a total of 37 percent. Three of the four regions remained unchanged and Asia Pacific gained 1 point of share.

Now, I'll give you detail on our other businesses. Metrics for the Travelocity business; gross travel bookings were 915 million. This represents 70 percent growth compared with third quarter last year and growth of 1 percent sequentially. Total merchant revenue, as a percentage of transaction revenue, was 20 percent. And as we roll into 2003, we will continue to update you on our merchant revenue goals and performance against those goals. During the quarter, Travelocity membership rose by 1.2 million to 36.5 million members. Average monthly unique bookers were 713,000 in the third quarter compared to 664,000 a year ago and 672,000 in the second quarter of 2002. The conversion rate was 6.1 percent. Metrics for the GetThere business; GetThere continues to sign significant distributor agreements. In this quarter, we signed an agreement with World Travel BTI, which means GetThere now has relationships with the top six travel management companies. We also signed several new supplier customers including Aloha Airlines, Air Jamaica and Regional Express in Australia. During the third quarter, GetThere total trips were approximately 2 million. Total trips increased 17 percent year over year. A significant portion of that growth is attributed to the momentum from our distributor partnerships. Corporate trip transactions grew 87 percent year over year and 14 percent over last quarter. Supplier trip transactions declined 22 percent year over year, primarily due to the loss of two customers, America West and TWA, as well as underperformance by UAL. Adoption rates continue to grow this quarter. Total adoption exceeds 17 percent. Adoption rates for our top 10 customers grew almost 8 points sequentially to reach 56 percent.

Now, turning to expenses, operating income and margin for the quarter. Expenses from continuing operations were down 8 percent year over year. Operating income from continuing operations, excluding special items, increased 27 percent year over year. Operating margin for the quarter was 20 percent for the overall business. On a year to date basis, that puts us almost 6 points ahead of 2001, which goes to our aggressively managing cost. For the quarter by business units, TM&D reduced expenses by almost $37 million. Airline Solutions reduced operating expenses by more than 8 million and improved operating income by approximately 2 million. GetThere reduced operating expense by 3 million. Travelocity incurred an operating loss for the third quarter primarily due to weaker than planned revenue, increased advertising spend, and the establishment of a credit card fraud reserve. We expect Travelocity to incur an operating loss in the fourth quarter and return to profitability in early 2003. Just a few comments on other financials; our cash and marketable securities balance was 857 million. Our EBITDA for the third quarter was 116 million, and is now forecasted to be greater than 450 million for the year versus previous guidance of approximately 500 million. Our free cash flow for the quarter was 71 million, and we expect full year cash flow to be greater than 250 million. Before we open the lines for questions, I'd like to talk briefly about our outlook for the year. We reiterated our full year revenue and earnings per share guidance. We are comfortable at the low end of the EPS range of $1.85 to $1.95. Our total company revenue growth projection remains unchanged at negative 3 to positive 1 percent year over year. For the fourth quarter, we expect earnings per share excluding special items to be in the range of 20 to 25 cents. One thing we haven't discussed is capital expenditures. Our third quarter spend, like the preceding the quarter, was less than our plan. Therefore, we now expect to end the year with capital expenditures between 70 and 80 million. Now, I'll turn it back to Bill

Thank you. I'll turn it to Karen.

Hey, Trudy lets open it up 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 "#" sign. Your questions will be queued in the order that they are received. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again if there are any questions, please press the "1" on your touchtone phone. One moment please. Our first question comes from James Kissane of Bear Stearns. Please state your question.

Thanks, and hi Bill. A little confused on some of your comments on pricing. And I guess the bottom line, is it safe to assume that you will be raising prices on average across the network going into '03. I mean, just given some of your comments on the pricing or the yield that goes through your channel or the alternative channels. I mean, it seems like you are bringing a fair amount of value and should get price.

Bring in a significant amount of value at the highest yielding channel, which is very important to the airlines. But as I said I am -- I'm not trying to be cute here, I'm just painting the picture as we see it heading into the backend of the year when we typically make our pricing decisions. On the plus side, it is a significant value that we bring. The -- and we need to be very aware of what our competitors will do, especially our airline-owned competitors, if they were indeed to raise price and turn that back around into incentives. On the other hand, we also need to be cognizant of what's going on in Washington, being that our GDS business is regulated. So again, my intend is not to be cute or to confuse, but to paint the picture as we see it as we head into the backend of the year. It's different from any other year, certainly when you think about pricing.

Okay, and...

Specifically, which was -- I think was part of your question as well for this region of the world. When you look at the significant losses in the carriers, it's exactly what's -- it is taking place in the US. When you think about our bookings and bookings in the US were down 8 percent year over year in the quarter whereas internationally they were about back. They are half a point -- approximately, half a point down year over year. By the way, also with me today are -- as I said, Jeff Jackson is with me along with Hugh Jones. And I also have Eric Speck here, our Chief Marketing Officer; and Sam Gilliland, CEO of Travelocity.

Okay. And, Bill, any update on the Corporate Connect product? Are you seeing any corporations or corporate travel agency signing up, looking to switch? And if not, you know, what are your thoughts?

It's interesting. That's a long answer that I'll try to be short on. We knew going into this -- and I think we talked about it on the call. We announced Corporate Connect -- that it's complicated by definition because a multilateral negotiation with the GDS with the corporation, with a corporate travel agency, and the suppliers -- the point being that we are making this offer for significantly reduced booking fees for the supplier; but the expectation would be that the corporation would go back to the supplier to see what their cut of that cost saving was which had been a promise made by suppliers for the last couple of years. It's been interesting to watch how much energy has or hasn't taken place around, you know, that $2 per segment and how many ways you could possibly split that up and how much time you should spend working on that. So we'll see. That has certainly been an education process, because it's not simple to understand what the offer is, and there are so many players and the dynamics of all of those players. And certainly, we've learned that some didn't understand it when we rolled it out and have put more energy behind it recently -- and two of those that are putting energy behind it now are two of the largest carriers in the US, just in the last couple of weeks. So we'll see how that one plays out.

Okay. And just to make sure Jeff's there. Jeff, can you comment on the free cash flow? It sounds like you're upping the guidance to about 250 from 220; and I guess, it's because of the CAPEX -- kind of elaborate?

Yes. I am here; and, now, you see why...

Okay. And maybe you should answer.

No, you said it correctly. We are upping the guidance. It's primarily because of the combination of hitting earnings targets plus reduced CAPEX. And Hugh described that -- really the reasons for that reduction which have been playing out, really, in the last two quarters have been -- you know, the take private transaction allowed us to get a little bit more efficient on our spend between the two companies. And just the demand for overall in the travel industry has met, we've had to add less capital than we planned. But it will be ramping up in the fourth quarter to reach those levels of 70 to 80 that we talked about.

Okay. Great. Great job. Thanks.

Thanks, Jim. You'll remember that we were about 158 last year and we have been talking about 100 to 110 this year. We are taking that down 70 to 80. But based on where we are year to date, it is a significant spike up in Q4 focused on the shopping capability, technology investment at Travelocity.

Okay. Thanks.

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

Good morning. On bookings, Bill, you talked about you saw positive bookings growth after 9/11. I mean that's pretty easy since nobody traveled after that. Can you talk about October? And then, are you still seeing positive year-over-year comps?

Yes, we are seeing positive year-over-year comps. I'd be -- and to your point, it's pretty darn easy to have positive year-over-year. Last October, I think, was down -- hell, I forgot, let's say, 30 percent year-over-year or something. So, yes, we're seeing positive comps and to your point, that's awfully easy to do. Now, at the same time, again, you know, we're not jumping up and down with joy in the rate of the rebound. I think that the Airlines that have talked about Q3 in the last couple of days have talked about October looking like July and August; and we're seeing similar trends.

On Travelocity, could you assign, sort of, percentages to the reasons for lowering your expectations? You gave a lot of different reasons. But could you, sort of, give us idea where the magnitude of the drivers were?

Yes, we talked about the rate in the mix. And I'll kick to Sam in a second. I mean, we -- the start point was the resetting of the per transaction revenues coming down about 20 percent in early Q2 and then having a build up after that. And so the -- I mean, that is the driver -- that is the key driver. That's simple when you're talking about $12.50 approximately per transaction versus the number 20 times higher than that -- 20 percent or 25 times -- 20 percent higher than that. And you saw or heard or read what the volumes were at Travelocity. The gross bookings were up about 17 percent when revenue was only up about 5.8 percent, which is again that gap. It's all about packaging, it's all about merchant hotel and car; and that's why it's so important for us to roll out in the niche by the end of the month. You can late bait selling by the end of the year. And then in the beginning of Q2 of next year dynamic packaging capability so that by the end of next year and I hope I'm not taking all of your time [ph] to understand -- we're able to double our merchant hotel volumes or percentages going from about 30 percent to about 60 percent and doubling air merchants within 15 months. Go ahead Sam.

Yes, hi Matt. If you look just at the air unit revenues on a year-over-year basis, it's right there in the range that Bill said. So it's -- excuse me -- at about 21 percent below on a unit revenues basis where it was a year ago. So that's the primary driver of our situation from a revenue and earnings perspective. In addition to that, we had planned to have a greater mix of Hotels.com sales in our overall volume of hotel sales. And so while Hugh laid out some fairly impressive year over year numbers in terms of HRN sales growth, it certainly wasn't where we projected it to be. So we've done a lot of work to continue to grow our Hotels.com mix. So that's one element. And then just to emphasize at a few other points that Bill had made. We are improving the air-booking path, and we're doing that with a new air-shopping engine that includes leg-by-leg shopping. It will provide more options and a greater variety of choices to the consumer. And so you'll see we should see improvements simply related to the improvements in the Air Path. But, as you know, a lot of it now is much less about the Air Path and more about those package sales. So a lot of focus right now on getting our enhanced packaging built, which as Bill said, was second quarter of '03, improving through our introduction of our own merchant model hotel product which will come here toward the end of October, improving our mix of merchant hotel sales and again improving Hotels.com mix and also improving with our own merchant model hotel offering.

And then some follow-up details on Travelocity. What's the number of tickets that you sold in the quarter versus competition, if you have an idea?

Yes, we do have an idea. We've pulled away from all but one during the quarter.

Yes. And I think just that -- I don't have the exact number of tickets for the quarter. What I will tell you is that in the first full month, after we announced our relationship with American Airlines -- so the first full month being September -- we have really acquired back a lot of share in the airline market. So we feel very good about not only air growth months over the months but how we look for the quarter. And then, secondly, as you think a little bit more about where we're headed, let me -- I've got a total ticket number here for Travelocity. Let me just play that out here. It's just a little over 7 million tickets.

In the quarter?

7 million bookings -- I'm sorry. Yes, for the quarter.

And, finally, what would be the operating profits that you're hoping to get in all of 2002 and Q4 for Travelocity?

You know, we can't say that now. We said that the operating profits back into profitability in first quarter for sure.

Okay.

Keeping in mind, I said the operating loss this quarter of 4.8, about 3.5 of that was bad debt reserve and establishing a credit card fraud reserve for the first time [indiscernible] private.

And then finally, could you just update us on your Travelocity's relationships with airlines beyond the seemingly good agreement with AA?

Yes, and let me speak more broadly, and then, I'll talk in a little bit more detail. We have been very active with all suppliers whether it's airlines, cruise companies to improve the relationships that we have with them and do a better job of selling their inventory through our site. We obviously announced the AA relationship and I think even through that announcement in many respects, because it is a competitive environment, it has improved our relationships with really all the airlines that we work with. So on a broad basis, every -- you know, every relationship has improved, and we'll just continue to focus on how we better merchandize their products. You know, we believe that we have the best of breed CRM technology. So whether it's e-mail or direct mail or promotion from the site, we'll continue to be a good partner for these guys.

Trudy, next question.

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

Thanks. Just two quick questions. Bill, could you talk a little bit about the merchant hotel offering. You've touched on that earlier but how do you expect that to be differentiated, you know, versus Expedia for example?

[indiscernible].

Well, we -- you know, there is some good news and coming to the market at the point that we've gotten there, which is at the end of this month -- and that is that we don't have much of the baggage on the legacy systems and processes that our competitors do. So we've learnt from, I guess, the mistakes through the legacy and improved upon that. So, when we launch, we'll have an integrated solution that allows the hoteliers and hotel chains to maintain a single image in their inventory rather than simply using this more cumbersome allocation approach either by an extranet or fax or e-mail or phone. It's not a great process today and so while we'll certainly offer an allocation based functionality as well, we are focused on this integrated solution and about 80 to 85 percent of those hotels that we've spoken with and contracted with for launch, have said they want to go with this integrated solution. We also think that we built a little bit better business model from what's out there today. So we offer better payment terms, we pay upon checkout rather than having net 30 and net 60 invoicing. And finally, we offer revenue share to our hotel partners above certain thresholds. So, we believe we've struck a much better balance between what the hotel properties need, what the hotel chains and really have a much better bottle than what's out there today.

Thanks and just one quick final question. Could you -- you may be sketch up on what your thoughts are with respect to pricing outside of the US. Would you expect significant differentiation for '03?

Not sure yet. Dave, we'll see how that plays out over the next several weeks. I expect that we'll be talking about that in November. I don't want to play-- I don't want to play our hand with our competitors.

Okay, thank you.

Thank you.

Our next question comes from Jenny King-Dugan of Merrill Lynch. Please state your question.

Yes thanks. I was wondering if you could give us a little bit of an update on incentive expenses. I realize that they are likely outpacing revenue growth as they have in the past, but I wonder if you could tell us what the year over year growth is in the average per segment incentive fee?

Yes, the growth is in the low single digits this year, and the incentives continue to be below a dollar.

But are they up on average on the year over year basis?

Yes that's what I said earlier Jenny. They're up in the low single-digit range.

Okay.

And 4 or 5 percent up year over year.

Okay. Also, in terms of consolidation in the travel agent space in the traditional travel agency market. Are you guys right now -- do you think you are today -- you are benefiting from that or if that's been a bit of distraction from your market share? I mean are your own agent's gaining or loosing?

Absolutely our own -- agents are gaining, which has been an advantage for us for sometime. The largest agencies in North America are our largest customers and what we have -- about 47-48 percent share in North America. When you take the top five, top six you'll see us often in the range of 55 percent or plus share of those agencies.

Okay, great thanks.

Thanks Jenny.

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

Thanks. Two questions, first a clarification on the bookings for the fourth quarter with the easier comparisons. Is a low to mid single digit year over year growth in bookings a reasonable expectation?

Yes.

Okay and then secondly, can you help us think about the incentives parts? If the pricing strategy changes for next year, how does that affect the ability to scale back on incentives? Can you just elaborate on some of the industries economics there that we should be looking out for?

I wouldn't elaborate on much because again we're not saying that we're not going to be increasing prices next year. We just kind of painting the picture on the various possibilities for having considering the unique environment. But the macro view that if there's less system -- if there is less money in that system, less money to be spent. So you should assume that that would also mean a lag and that were indeed to take place. Right.

Right. Okay. Actually one last question. On the credit card fraud reserve, going forward, are there going to be additional increases in this reserve or was it just a one-time step up?

It was a one-time -- you want to go ahead and talk about it, Steve.

Yes, Greg, it was a one-time step up. So we have been expensing credit card fraud along the way, but this essentially established a projected liability for the fraud. So I would not expect to be increasing that unless, of course, credit card fraud increased.

Okay. Thank you.

Thanks, Greg.

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

Yes. Bill, I was wondering if you could give us an update on the Sabre Exclusives and how that's going?

Yes. It's going quite nicely, as a matter of fact. Sabre's Exclusive has been - we've been up and running now for a couple of months. We had a couple of key milestones in the last couple of weeks. As a matter of fact, last week was the first time we exceeded 1,000 bookings a week, which is about 2,200 room nights, because we're averaging about 2.2 room nights per booking. We have about 12,000 US travel agencies that now have access to Sabre's Exclusives. We're launched in over 70 cities -- I think, 77 is the last count. We have about 1,300 hotels under contract -- are just short of 600 in the system. So our expectation as well, if you recall, was to have a spread in the mid 20s. And, therefore, operating -- so margins, obviously, in mid 20s as well, because it's almost that simple, about a $100; and that's what we're seeing.

Okay. And then are you planning on using the same inventory for the Travelocity merchant hotels or will those be two separate contracts?

Good question. What we've done is coordinate our efforts between Sabre's Exclusives and the Travelocity guys to make sure that we don't run into each other in front of our hotel or hotel chain customers also leveraging the platforms from a technology perspective. But they are two separate contracts because, again, you're targeting a couple of different channels and targeting at a couple of different segments. [indiscernible], do you want to add to that?

Yes, I would just add that, you know, we are very closely coordinated on any discussions we have in our hotel chain. So we can go through that contracting process together, and we will. If the hotel property or chain doesn't want to do that, then those are separate discussions. But they are -- as Bill mentioned, these are separate markets that we're addressing; and Travelocity has a different inventory of offerings that it goes beyond just the merchant model hotel component sale and into last minute sales, vacation sales, bundled sales which again with the packaging capability that we'll offer in the second quarter of '03. We'll make that offering available as well. So it is a little bit different discussion than the travel agency channels.

Okay. Thanks. And then, finally, on the booking summary of a couple of line items that, I think, are new -- the breakdown of direct and non-direct. What goes into direct and what's non-direct bookings?

Yes, we've broken them out that way in the past.

Okay. Well, what are they, then just for my clarification?

Sure. The 4.7 is the total bookings number of what we are receiving the full booking fee or our partners are receiving a booking fee. Abacus would be an example of that.

Okay.

The direct bookings is a 7 percent down number, which is -- we think that the direct bookings are full both about $4.20 per booking.

Great. Thanks.

Our next question comes from Steve Major of [indiscernible]. Please state your question.

Hi Bill. A couple of questions for you. What would you expect your cash balance to be by year-end? And also just the free cash flow number of 250 -- is that a -- how would you define the free cash flow number you're using? Is that the 4 -- or is that after taxes, after interest or a clean cash flow number? And then -- and, lastly, given that you've bought back stock close to 26 bucks, what is the capacity and the thought process in terms of buying back stock at these levels? Hello?

Yes, Steve, the average for our buy -- we finished our -- we completed our authorization of about [indiscernible] million remaining. We bought about 2.2 million shares at an average price at nearly 24s. And I expect that we will made significant -- a key agenda item for our board meeting in November will be the cash. Our expectation is that we will finish the year with a cash balance of about $900 million. And your last question, I think, was on free cash flow or your second question was on free cash flow? Is that it.

Yes.

Excuse me. That cash flow is, I think, what you would call a free -- a clean free cash flow number; taxes are out, interests are out, capital expenditure is out. I think it's exactly how -- I think it's as clean as it can get.

Okay. Thank you very much.

Our next question comes from Paul Keung of CIBC. Please state your question.

Yes, can you -- on your capital expenditures, you mentioned there'll be a ramp up in the fourth quarter. Could you just give us some color on major capital investments you expect to do on your platform, on and offline for GD -- I mean, the core versus the online over the next 12 months including the ramp up of the pricing engines that you have. And in other words, will that number go up from 70 to 80 million back up to 100 to 120 next year?

As far as next year, we'll talk about that in November. But as far as the ramp up for Q4, Paul, we ended Q3 in the low 40s, and we're saying that we're going to ramp up to 70 to 80. And the significant portion of that 30 to 40 is in the, again, in the shopping technology. Now, just so I'm clear, we are investing in the -- this is all about ATSE and leveraging ATSE across the entire portfolio. So the shopping capability that we're building for Travelocity can also be used by other assets in our portfolio. So it's not as simple any more as the online work business versus the core GDS business, for instance.

Is that, you know, a one time for next quarter or is that going to be an ongoing investment?

Well, hopefully it'll be ongoing based on demand, Paul. That's a good question. Yes, it is demand driven...

It's a demand driven. Okay.

...as well as functionality driven, yes.

But Paul, I don't' think you should expect declines next year. I think, you know, that's on the 70 to 80 range.

Right.

Right.

Okay. And then just some color on -- this was a question asked on the international side of your business. And you know, in terms of the market share gains both on and offline there?

Yes, I think we only had a single share points gain in Asia Pacific and we were flat in the other two regions, Paul; Europe, Middle East, Africa and Latin America at 14 and 51 percent respectively.

So, you're expecting to look at buying -- to buy more business out there or gaining more share? What are some of the strategies out there at this point?

We continue to execute on multiple fronts from a share prospect. So lets go ahead and use Europe as an example. Certainly, we're looking to gain share -- share of travel wallace. So it's not just the kind of the core GDS business. It's certainly important to us, but whether it's our partnership with Travelocity.com EU with - and ownership [indiscernible].com with Travelocity.com period. So it's the global brand, it's the regional brand, it's the country specific brand and then certainly with our GDS business acquiring and retaining agency point of sale.

And that's -- Sam [indiscernible] numbers work out here. The $900 million that you mentioned at year end is that -- that's before any incremental share purchases, is that correct? Is that with some assumption for that?

No, that is without any assumptions.

Thanks.

Our next question comes from Michael Millman of Solomon Smith Barney. Please state your question.

Thank you. I have two questions. You, I think in answer to Jenny's questions about market share said that your travel agency share had been rising. It was up to 47 to 48 percent. But on the other hand, you said that at least in North America your market share stayed at 47 percent. So I was wondering if there is a disconnect here and or may be you can give some color on what the differences are? Secondly, may be, can you talk a little bit about, specifically, what the GDS regulations that you now live under -- they go beyond, kind of, this fairness and may be can you give us some color on that?

Yes, Michael. I'm not -- may be, you can help me with more -- with the second part of your question. The first part of your question, I don't -- if I -- I don't think I had said that our share was growing at 47-48 percent. What I was talking about was the implications for us as bricks and mortar agencies consolidate, which is good for us, because our bricks and mortar share is growing, but the net is flat at 47-48 and that's due to some of the online business. Frankly, it hasn't been all that interesting to us because certainly from a profitability perspective all bookings aren't created equally.

Right. We're ahead of our plans, beating our plan this year for brick and mortar share and the year over year growth of orders which is starting to anniversary at this point is really inch and the shift outside of the channel is what is pulling the overall share down.

I see. The other question. You mentioned one of the sensitivities you have regarding pricing is that GDS is regulated, and could you talk about what the similar specific regulations are? I guess, what I was saying is I thought there was some generally -- and I didn't know you would call it regulation but to be fair with -- this is very layman kind of talk, but may be you could be more specific about what regulations you fall under?

The CRS rules have been in place since the early 80s and are being updated as we speak. They haven't been updated for the last administration rolled on for, I think, five years and this administration is taking them on, updating them before taking into account the Internet, for instance, which I think is a good thing to do. But, with any regulated business, we need to be sensitive to all the nuances [ph] of politics in Washington, and we've got to be talking some of the fact that we have our biggest customers are losing $8 billion this year and the government is really concerned about that. You know, as far as...

Yes.

...period.

Jodiewe have time for one more question

Our last question today comes from Stuart Lawson of Analyst Capital. Please state your question.

Hi. I know that you're going to give guidance for '03 in a month or so, but you guys have done a great job on the costs savings, I was wonder, if you could give us any sense of how much more costs are there that you think you could pull out in '03?

Yes. We - there's still room. I am not going to give you a number now. Stuart, again we'll talk about that, and as I said, we have been very aggressive on the cost side, but we are not to the point where you are burning the furniture to keep the house warm, and we'll continue to be cognizant of that. So, what that means, we continue to re-engineer the business. The cost always begins in the way that we do business and make sure that we are not lacking in any way to make the kind of technology investments that we need to make to continue to be leader in long spaces which goes to the CAPEX spend in Q4, for instance, edge focused on Travelocity. But there is always room, it's the usual balancing act of making sure that we are doing the right things in spending the money appropriately to maintain our leadership positions and come out of this, this time in our industry's history and strongly invest them.

Okay, so given the current environment, there is enough cost savings to still get -- certainly still get EBITDA growth next year?

We'll talk about that next month.

Okay. Thanks.

Jodie, we'd like to go ahead and end the call. Thank you everybody.

Ladies and gentlemen this does concludes today's teleconference. Thank you for participating, you may now disconnect.

Okay guys, if you're still there, I look forward to talking to you soon and expect we'll be seeing you soon. Thanks.

END