Sabre Corp (SABR) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Please continue to hold. Your conference will begin momentarily. Thank you for standing by. Good morning or good afternoon and welcome to the Sabre Holdings conference call to discuss the first quarter 2003 results. At this time, all participants are in a listen-only mode. However, later we will conduct a question and answer session and the instructions will be given at that time. Just as a note, if you should require any assistance during the call, please press zero then star and an AT&T operator will assist you offline. As a reminder, this conference is being recorded today, April 17th, 2003, and is also being broadcast live over the Internet. With that being said, I would now like to turn the conference over to Ms. Karen Fugate, Vice President of Investor Relations for Sabre. Please go ahead, ma'am.

Hello, everyone. I'm here with Bill Hannigan, Chairman and CEO, Jeff Jackson, Chief Financial Officer, and Sam Gilliland, President and CEO of Travelocity. Bill will review highlights for the quarter, Jeff will review results in more detail and Sam will provide an update on Travelocity. I would like to remind all of you that some of our comments on matters such as forecasted growth and revenue, earnings, bookings, operating margins, cash flow, 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. Those factors are described in the risk factor section of the company's most recent form 10-K filing with the SEC. The company undertakes no obligation publicly - to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliations of our special items and non-GAAP financial measures in our earning press release and on our website www.sabre-holdings.com/investor. Now I'll turn the call over to Bill.

Thank you, Karen. Thank you all for joining us. This morning I will briefly touch on a few things before handing off to our CFO, Jeff Jackson, for an in depth review of our numbers. My opening comments will touch on some recent actions taken in support of our strategy. Sabre Holdings results for the first quarter, our initial pass as a wore-revised (ph) outlook for the full year and our plan to communicate as our visibility improves and the dividend announcement made earlier today. Let me start with our difficult tend announcement.

Our you assumption is the industry will key cover, we just aren't sure when, what we are sure of is our ability to generate earnings even in a poor demand environment. While we would prefer to have the wind at our industry's back for an announcement like this, there are some things we just can't control and the impacts of the war, the economy and SARS would top that list. However, there's a much longer list of things that we do control. On that list would be the ability to return a portion of a profits to our shareholders in the form of a quarterly dividend. Our board of directors has approved a dividend of 7 cents per share payable on May 15, 2003 to shareholders of record at close of trading on April 30th. As of yesterday, the dividend yield is approximately 1.61% or $40 million on an annualized basis. This compares to the S&P 500 average yield of about 1.84%. Even in the current demand challenged environment, we will continue to produce positive free cash flow. The various demand scenarios we have run cause us to be comfortable with the resulting payout ratios. We also believe a regular dividend will make our shareholders more attractive to a broader base of investors. And we will maintain the financial flexibility and liquidity to capitalize on future opportunities which could include stock buybacks and strategic acquisitions.

A couple of notes on strategy and tactics. We took a number of actions during the quarter to position us well for the long term. Travelocity. Our Travelocity company recorded solid results in several key initiative areas during the quarter. Sam Gilliland will address those and the corresponding results in a couple of minutes. We also announced we will launch a Travelocity business. We believe small and medium sized businesses are the next level for online travel procurement. Travelocity business is a great example of how we can -- in the Sabre Holdings portfolio. Industry leading policy based technology with Travelocity's brand, content and customer service to create a new offering with unique positioning in the marketplace. We are the undisputed leader and we are leader in the unmanaged corporate space. This move is the next logical step. The Sabre Travel Network, which we previously referred to as Travel Marketing and Distribution.

Earlier this week, we announced the world's second largest carrier has signed on. United Airlines commits to a three-year term at the highest level of participation in the Sabre CRS while agreeing to provide all fares, promotions and services to all Sabre-connected agencies, both online and offline. In exchange, United locks in a reduced booking fee for the three-year period. We continue to make good progress in reducing fare confusion in the marketplace while also gaining long term commitment for full support for our travel agency customers by our airline customers. This is a good place as any to comment on the CRS rules. The agreement with United Airlines, our ninth airline customer to sign a long-term deal, comes a few weeks after the March 17th deadline to file comments with the DOT on the proposed rules governing CRS's. More than 400 filings have been registered on this muddled DOT proposal. Most believe the reasons we have CRS rules in the first place are no longer valid. We agree. We believe the rules should be allowed to sunset on January 31st, 2004 when they are currently set to expire. Hearings will be held this spring. We had hopeful that Bush administration will proceed with the prompt deregulation of our industry.

Sabre Airline Solutions. We signed over 20 new significant contracts during the quarter in all regions and in all business areas. The giant eastern contract marks the sixth significant carrier in the Asia-Pacific reason to sign up for our control center. Integrated product sweep is essentially the nerve center of an airline. We are now delivering the solution to three of four major carriers in China, the fastest growing market in the region. GetThere. GetThere's business were certainly clobbered by the demand drop. However, corporate bookings still grew by 56% year over year. We're in the midst of rolling GetThere's release six product in the marketplace and also announced a new website search tool, WebConnect, that will be available this quarter. This tool fully integrates -- into the display and booking process of the corporation's travel management system, yet another step to reduce fare (ph)confusion in the marketplace.

On a technology front, our migration to the platform continues to attract nicely against our plan. As a reminder, ATSE is our open systems based fare management shopping and pricing platform. Travelocity went live on ATSE late in 2002. During the quarter, we upgraded bargain finder plus to provide greater breadth of choice and response to fare queries increasing the response from nine to 30 options. Keeping in mind even prior to this upgrade, we consistently win on line taste tests for the most viable itineraries. Since insulation, the platform has developed -- delivered 100% up time and reduces costs by more than 40%. And our developer productivity has doubled. As we said before, 2003 and part of 2004 will be a bubble period from a cost perspective. We're running our legacy pricing complex and ATSE in parallel during the migration period, so portfolio-wide savings versus system-specific savings are still a little bit more than a year away. We'll be migrating our U.S. travel agency base through ATSE later in the year. Results for Q1. Important milestones were met and three of our four companies grew during the quarter, but only one of our companies, Sabre Airline Solutions, grew anywhere near our pre-war expectations. For the quarter, earnings per share on a GAAP bases were 45 cents compared to 64 cents in the year-ago quarter. Earnings per share excluding special items were 36 cents compared to 62 cents in the year-ago quarter.

Total company revenue excluding the one high pressure one-time gain was down 7.6% from the year-ago quarter. Other important financial metrics for the quarter include free cash flow 2 millions, EBITDA of $134 million and TSG's company wide operating margin excluding special items 16%. Outlook. Our ability to accurately forecast as we sit here in the midst of a war or its immediate aftermath is fairly limited. As a result, Jeff is going to walk through a scenario that will provide you with a frame of reference during the involved period. As visibility improves, we will provide updates. Our hope is that similarly, 2001 and early 2002, our demand recovery projections will end up looking overly conservative in hindsight. With that, let me turn the microphone over to our CFO, Jeff Jackson.

Thanks, Bill. Now I'd like to review with you the financial performance for the first quarter of 2003, and I'll start with revenue by business units. Then I'll go on to discuss our outlook for the second quarter and the full year. Let me start with Travelocity. Travelocity had revenue of 80 million, and that's growth of 9%. Transaction revenue was 64 million, growth of 26% for the quarter. Advertising revenue was 9 million for the quarter, a decrease of 30%, and expected driven by partner advertising short falls. Other revenue for the quarter was 8 million, down year over year about 28%, and this decline was primarily due to the continuing investments in Travelocity's joint ventures. Breaking down transaction revenue further, on the air side, transaction revenue was up 5%. The service fee implemented in January contributed to this growth but was partially offset by the impact of weak booking volumes brought on by the war. Non-air transaction revenue, which is made up of hotel, crews, vacation and last minute, grew 75% year over year, and 27% sequentially. Total hotel revenue grew 27% driven by an 84% increase in hotel merchant revenue. And our cruise, vacation and last-minute category grew 195% year over year and 74% sequentially. Primarily due to the growth in last-minute deals on our very successful cruise super sale launched in January. Total merchant revenue as a percent of total transaction revenue, which is a very important barometer of our future success, it was wen 2% for the quarter.

On the hotel side, 63%. Our own hotel merchant product made up 24% of hotel merchant revenue, up from 8% in the fourth quarter of 02. To sum things up, overall travel -- the good news is we executed on all strategic imperatives, merchant revenue mix, growth in Travelocity's own merchant hotel product and significant growth in last-minute package sales. The GetThere business, revenue for the quarter was 12 million, representing growth of 4%. On the corporate side, we continue to see strong growth of 51% for the quarter, however, supplier ref thank revenue declined 36% year over year. Sabre Travel Network business had revenue in the quarter of 389 million, a decrease of 10%. This decline was primarily the result of significant decrease in bookings volume immediately following the start of the war. On top of already depressed booking volumes from the pre-war travel slowdown we saw in February. Sabre airlines solutions segment recorded revenues of 55 million for the quarter. That's 6% growth year over year. This growth was driven by successful sales efforts in the products and services group and in the latter part of last year. Now I'll move on to metrics supporting the financial results for the quarter. Starting with Sabre Travel Network bookings, total global bookings processed in the quarter were 94 million, a decline of 13%.

Due to the dramatic change in worldwide booking levels from pre-war to the start of the war and beyond, I'll break out global bookings processed into further detail. The period leading up to the nation's first orange alert on February 7th, bookings were down 12% during the period from February 7th to March 16th, bookings were down 17%. And from March 17th, the commencement of the second orange alert, to the end of the quarter, bookings dropped 28% including several days in the high 30's immediately following the start of the war. Moving back to total quarter results on the booking front, U.S. bookings declined 17% for the quarter and international bookings end of ended the quarter down 9%. Bookings were below our expectations in every region of the world. Air bookings end ended the quarter down 15%. Non-air bookings were down 2% for the quarter, and finally direct bookings were down 14% for the quarter. Now an update on Sabre Travel Network's booking share. Worldwide bookings share in March year-to-date is 35%. This is down approximately two points, primarily due to the anticipated loss of two agency customers through acquisition by a competitor. By year-end, we expect our share to improve to 36%. On a regional basis in North America, our share was 45%. EMEA, our share was 14%, Latin America, our share was 50%, and in Asia-Pacific, our share was 53%. I'd like to talk briefly about our progress in Sabre exclusives. We now have 10-month selling experience on our Sabre exclusive merchant hotel product through the traditional brick and mortar channel. Through Sabre exclusives, we expand our relationship with agents and drive significantly higher variable contribution compared with the traditional booking fee model. We now have 1500 hotel properties signed up in 135 cities.

We are selling through agents in Canada, and over 31 agents in North America book Sabre exclusives in the first quarter. These agents booked over 32,000 room nights during the quarter and we had a record bookings day at the end of last week, which was the first day since before the war. Moving on to Travelocity, Travelocity gross travel booked was (inaudible) 96 million for the quarter, growth of 14% over last year. Revenue as a percent of gross travel booked for the quarter was 9%, up from 8.5% in the fourth quarter. Travelocity's industry-leading membership rose by more than 1 million to almost 39 million members. The launch of merchant hotels helped drive our merchant hotel mix to 45% for the quarter, keeping us on track for 55% merchant mix by year end. In less than six months, we have contracts covering 7500 hotels and operationalized nearly 2500 of them. The number of Travelocity's merchant hotel bookings grew from 80 -- grew 80% from January to March, illustrating the rapid adoption of this offering. Unique bookers in the quarter were 966,000 versus 938,000 last year, and average monthly unique bookers were 668,000 how in the first quarter compared to 613,000 a year ago. Now moving on to GetThere. Total transactions processed for the quarter were more than 2 million, an increase of 15% from last year. Breaking that into two primary category, corporate transactions continued to be the biggest driver of growth forget there. They grew 56%. Supplier transactions declined 19% for the quarter.

The year over year decline was primarily due to the loss of two customers, America west and National, in the middle part of last year. Now I'll turn my remarks to expenses, operating income and margin on an adjusted basis for Sabre Holdings and by business unit for the first quarter. Total company expenses increased 4% for the first quarter. Consolidated operating income increased 58 million year over year, and total operating margin for the quarter was 16%. For the quarter by business unit, Sabre Travel Network held expenses flat year over year and had a 23% operating margin on an adjusted basis. Airline Solutions had a 7% operating margin. GetThere reduced operating expenses by more than 3 million and cut their adjusted operating losses by almost 40% year over year. As we expected, Travelocity had an operating loss of approximately 5 million on an adjusted basis in the first quarter driven in part by an increase in advertising expenditures of $5 million. Coming into 2003, we took the necessary steps to ensure we had an appropriate cost structure and organizational capacity to execute on our business plans. One of these actions included the reduction of several hundred jobs at the end of last year. We continue to scrutinize the cost side. And in fact, due to current demand situation, we have been cautious about hiring and are running approximately 250 heads below our annual plan.

Once we get our bearings on demand factors influencing Sabre revenue, we will take steps if necessary to take the appropriate costs out of the business. Now a few comments on other financial data. As Bill said, our EBITDA for the first quarter was 134 million and free cash flow for the quarter was 72 million. We ended the quarter with cash and marketable securities balance of 927 million, and had debt on the balance sheet of 436 million. Now let me turn my remarks to outlook for the second quarter and full year. The revenue and earnings outlook for the second quarter and full year remains difficult to predict. We have produced a scenario for all of our businesses in which travel transaction volume relative to our initial plans reaches a low point in the second quarter and recovers to prewar levels by the end of the fourth quarter. Of course the biggest driver of this volatility is Sabre Travel Network bookings. For the second quarter, this scenario implies a direct and global bookings decline of approximately down 20%. That's a few points of recovery from our current run rates in early April. For the year, that translates into direct bookings decline of approximately 13% and total global bookings down approximately 12%. This volume scenario implies second quarter revenue decline in the range of 8 to 13%.

Second quarter earnings per share on a GAAP basis in the range of 9 cents to 14 cents, and EPS excluding special items in the range of 15 cents to 20 cents. Under this scenario for the full year, we would expect revenue growth on a GAAP basis to be positive 2% to down 3%, and revenue growth on an adjusted basis to be flat to down 5%. Full year earnings per share on a GAAP basis would be 86 cents to 96 cents, and EPS excluding special items are expected to be in the range of 95 cents to $1.05. Under the scenario, EBITDA would be greater than 330 million, free cash flow would be greater than 160 million, and we would expect to finish the year with a cash balance slightly in excess of a billion dollars after making three quarterly dividend payments. One additional point I want to illustrate is how the scenario plays out by business unit for the year. Travelocity will have greater than 30% revenue growth. GetThere will have greater than 20% revenue growth. Sabre Airline Solutions greater than 10% revenue growth. And Sabre Travel Network a revenue decline of about 10%. Now I'll turn it over to Sam.

Thank thanks, Jeff, and good morning, everyone. As Jeff has already spoken to the Travelocity financials, I'll provide you with a brief update on our progress with initiatives either recently announced or covered on our last call. First, Travelocity made a great deal of progress this quarter. To be sure, the war and SARS dampened traffic, conversion rates and revenues, and we've commented on several occasions that you'll not see our current efforts come to fruition in terms of financial results until the back half of the year. Having said that, we've provided you clear visibility on key metrics that matter now and will matter more later in the year. Specifically, our sales in merchant hotels as a percent of total sales is tracking to plan. We're ahead of plan in terms of operationalizing hotels for our merchant program. We expect that by nearly doubling the number of hotels we operationalize each month, we will well exceed the planned 4,000 hotels participating in our program by year-end. And it's clear that hotels (ph) and competitors have voted with their feet. With hoteliers opting nearly nine times out of 10 for our new merchant technology versus the Legacy models of our competitors. Finally, our non-air transaction revenue as Jeff mentioned grew 75% year over year, a good indicator of our overall direction toward our higher margin products.

We also continue to make great progress on our consumer offering. We're at the tail end of implementing, this week, our dramatically improved car shopping functionality. It's going in about two weeks ahead of schedule, and I expect going forward that we'll see even better than the 18% year over year growth we saw this quarter for cars. We're also on track for the delivery of our dynamic packaging capability this quarter. Very strong results from our usability tests and leap frog functionality in a number of areas, and the product has performed very well in integrated testing. And we've seen new records set in several of our businesses. In cruise, we met our aggressive revenue plan for the quarter during a very challenging time for the cruise industry. On a good day, we now fill two large cruise ships full of passengers. And while you might say the last-minute business is insulated from the effects of the war, SARS and the economy, I would go a step further to say that it is actually stimulated by the current uncertainties. March was a record month for site 59 both in terms of gross sales and revenue, and fort the quarter, volume exceeded plan by 10%. I should touch on our Travelocity business offering which we announced on April 2nd. We expect to launch the product this quarter serving the small and medium-sized business market. We will as Bill mentioned leverage the portfolio of Sabre Holdings, the expertise of GetThere, along with the brand, the content, the technology and the customer service of Travelocity. You're probably aware that the market for lightly managed travel is huge. We estimate it at somewhere around 40 billion in travel spend, and expect that our service offering, whether online or offline, can deliver significant cost savings to corporations. In summary, we're investing our way through the current situation. We're on track in terms of merchant hotel mix and operations, and continue to execute well across the business, and more specifically, on the initiatives that will bear fruit in the back half of the year and beyond. And with that, I'll turn it back to Bill.

Bill, before you get started, I want to make a correction. I mentioned the consolidated operating income increased by 58 million. In fact, it decreased by $58 million on a year-over-year basis for the quarter.

Ok. Before we get into the Q and A, I do want to comment a bit more on the outlook in our communication plan going forward. While all of our businesses are negatively impacted by all that's going on, certainly the degree of impact varies. Our largest business is Sabre Travel Network. As you all know for the travel industry. Transactions in the industry are down in a big way. That business while still nicely profitable, is going to be down. Sabre Airline Solutions is still capable of decent growth since our products are all about lowering costs and improving yields for airlines. The question will be just how hard-hit our customers and our prospect base is and our ability to make investments even investments with a quick payback. On the other hand, while we expect our online businesses will is growth dampened for the full year. -- 30% and 20% respectively as Jeff commented. On the communication front, our hope is that the world will settle down a little bit in the coming weeks and with that, our ability to provide a better view on full year 2003 will be sooner rather than later F that happens, I expect we'll be hosting an investor analyst -- in early June and while updating 2003 is important, I believe it's more important that we spend a day updating you on Sabre Holdings. While we may be slogging through this very difficult period, it doesn't mean we're hunkered down. The agenda will not include guidance for 2004 but it will paint a picture for you a couple years out. It will include a view into our strategies including available markets and target markets, our technology, our products, our product plans and our business model. This will be at the portfolio level and at a company-specific level. Again we aren't sure how long this valley is going oh to last. With that small dose of speech-making behind us, let's get into the Q and A.

Thanks, Bill. Let's open up those lines for Q and A.

Ladies and gentlemen, as you just heard, if do you have any questions or comments, we invite you to queue up at this time. Just press the 1 on your touch-tone phone. You will hear a tone indicating that you've been placed in queue and just as a note, you may remove you yourself from the queue by pressing the pound key. Also if you tried to queue up before hearing this announcement, we ask that you requeue at this time just by pressing the one on your touch-tone phone. One moment, please, for our first question. Representing Goldman Sachs, our first question comes from the line of Greg Gould (ph). Please go ahead.

Thanks. Bill, on Travelocity, can you give us some sense of market share performance in the quarter both in the merchant model and the traditional bookings, and maybe some trends that you'd expect over the next few quarters?

Certainly we expect to be gaining share over the next few quarters. As we've talked about for the last couple of quarters. The plan is back-end-loaded with the products that we are rolling in during Q2 specifically. As far as market share performance in Q1, we wouldn't have enough data at this point from our competitors to be able to appropriately calculate that.

Bill, hi, it's John. Just two quick follow-ups. There's been some more side-by-side advertising among consumer online sites. Is that just a sign that the merchant model is taking off or are you seeing some pressure on your pricing?

This is Sam. We haven't really seen any pressure on pricing, and particularly in the hotel arena. If you look at our ADR's, we actually see pretty good indicators. Actually higher ADR's than we saw last quarter.

On an overall basis, you indicated, Bill, that you expect -- or Jeff, you expect market share to gain one percentage point by year-end. Can you talk about where that would come from?

Well, we are -- yes, we can, and the answer is, it's really the mathematics of anniversarying share loss that we talked about, as well as gaining brick and mortar share in the day-to-day operation both last quarter and this quarter, so it's really - it's anniversarying the year over year impact and then sort of winning in the marketplace.

So for instance, Jeff talked specifically about or we've talked about in the past two large agencies that were acquired by a competitor which added up to about 1.8 dots of share. You would expect they'd use the CRS that's owned by that company. At the same time, we are taking advantage of Galileo leaving (ph) Latin America, and we've been very successful in the last month and a half in signing up hundreds of new agency customers in the several country that is Galileo has decided to pull out of, and that certainly is an offset.

Ok. Thank you.

Thank you very much, sir. Next representing Bear Stearns, we go to the line of Jim Kissane (ph). Please go ahead.

Thanks. Sam, can you elaborate a little bit on how your merchant hotel technologies differentiating you, and what are the factors of competition in that market? You said pricing is holding up pretty well.

About six months ago, when we were introducing our new set of capabilities and then we launched in late October, we had introduced a model which said we should be able to offer more efficient business model and technology process if we connect directly into the hotel reservation systems. Now we also have an allocation model, meaning this kind of Legacy model because there are some hotels that opt to go down that path, but it was really our view that we could certainly move more quickly, and we could provide a model that was more aligned with hotel chains than we'd seen in the past by directly connecting to the hotel reservation systems. So what you've seen even over the last several weeks are announcements by some of our competitors that they're following that move. And I think our intent will just be to strike a healthy balance between the use of that new technology approach and what we've seen in terms of Legacy models. So there is this competitive element related to just how we connect up with the hotels, and we certainly think we've introduced this better model both from a business and process perspective. In terms of competition on pricing in the marketplace, I think we've just felt comfortable as we've entered into the marketplace and as you've heard our merchant model volumes grow as we look at and monitor our ADR's, they seem quite healthy, and, in fact, you know, roughly 10% higher than we saw in the fourth quarter.

A couple of our larger (inaudible) customers had been fairly vocal about the power of single image inventory for them in running their businesses.

And Bill, if you were deregulated, could you give us some insight as to how Sabre would act and how shareholder and I guess maybe airlines would benefit?

You're kind of seeing it now. Some of what we're doing is in anticipation of deregulation with the three-year DCA offering. It's all about content. The travel agency channel, offline or online, is that much more effective for the suppliers with content, and that's why we've entered into these agreements where we're trading off typical pricing schemes in a deregulated environment where you're trading off long term commitments and volumes and content for discounted pricing. And we've been successful in signing nine airlines. The two large ones, of course, U.S. Airways and United representing two of our four largest airline customers, and so that's one version of it. A second version of how the market works in a deregulated environment or in anticipating deregulation is merchandising with the Sabre Travel Network where we are selling hotel rooms at five times what the yields would be in a GDS scenario. It's a small number now. That's one half of 1% of the hotels that we sell through the GDS. We sell about 20 -- we do about 20 million bookings a year in the -- through the Sabre GES. So again, it's early, gaining traction, and a couple of examples of what I expect will be the above model.

If I can get one last one for Jeff, Jeff, can you reconcile the transaction growth and revenue growth at GetThere? It just seems like the transaction growth on the corporate side is very strong but the revenues just aren't coming through.

Well, yeah, first of all, transaction growth on the corporate side is quite strong, and I guess -- I think the answer to this question is we're getting beyond -- we're seeing some stability in rates as we're getting beyond some of the pricing that happened over a year ago, and that's really driving it.

The supplier side is down 36%. I mean, we have had no yield erosion from the corporate side, but to Jeff's point, we had -- we took pricing actions last year, and so certainly from a year-over-year basis, we are now in that $6 per trip mode and have been for about a year.

I think you asked about the corporate side and that was in response to that. The biggest overall thing is that the supplier side, because of the loss of a couple of customers, is dragging down the overall performance. But you look at volumes and revenues on the corporate side and they're pretty much linked -- they're very close to each other and both very strong.

During second quarter of last year, America West and National on the supplier side went away.

Ok. Excellent. Thanks.

And thank you very much, Mr. Kissane. Next representing Lehman Brothers, a question now from Jeff Chalson (ph). Please go ahead.

Hi, guys. I have a question probably either for Jeff or Sam. Can you just talk about your profitability expectations for Travelocity for the year? Has that changed? Do you still expect to turn a profit this year or has that been delayed?

This is Bill and then I'll kick it to Jeff or Sam. It has not been delayed. Our anticipation has been, our plan has been second quarter, so this quarter. At the same time, we continue to be very flexible if we see an opportunity to make an incremental investment with the -- we would expect either short term or long term, so for instance, Jeff talked about Q1 where this is just taking one factoid, but we spent about 5 million incremental on the advertising side, and we're about 5 million from break-even. So we will continue to be open to those opportunities. At the same time, our plan is Q2.

Ok. That's great. Actually I heard Jeff say that. So what would the normal advertise spend be? Is 5 million considered -- I guess you said you had increased it, but what would the normal advertising spend be for Travelocity?

We have never given that number. We consider it pretty important competitive information.

To clarify, we'll cross over into profitability, or our plans have us crossing over into profitability. I don't expect the whole quarter will be profitable, but we will cross over in the second quarter. That's consistent with what we've said from the beginning.

Right. And then GetThere as well, could we expect that by the end of the year?

Well, what we've said and we're kind of -- you know, these are scenarios again, remember, and not our forecasts or our plan, but what we've said remains, which is that we'll have a break-even month probably in the third quarter, and then, of course, because of the size of the business relative to seasonality, we probably dip back below in the fourth quarter. But we think we're real close to still being on that plan.

Ok. Can you talk about trends and incentive payments in both Travelocity and in the Sabre Travel Network?

We continue to track -- we continue to track against our plan, which was incentive growth including Travelocity would be in the high teens and then incentive growth all in including our traditional travel agency customers would be in the very high single digits, 9, as a matter of fact, and we continue to track against that plan.

Is that going to change or is it going to continue to grow at pretty aggressive rate? Is that going to stabilize essentially is what I'm asking?

I would absolutely expect that trend to stabilize and start heading south, and that is directly linked to the behavior that you'll see in the marketplace around DCA3. We're having to ante up and pay a price for content. Our expectation, therefore, is the tradeoff in supplying that content to our agency customers, that there will be a balance on the incentive side, absolutely.

Ok. And then just switching gears a tiny bit, American Airlines, staving off bankruptcy, does that help, hurt, change your expectations in any way?

Well, for us, you know, as I think all of you know that in the FTN business, the contracts go through a clearinghouse, and whether it be United or U.S. Airways during bankruptcy, et cetera, those contracts were assumed immediately. For American Airlines, we would have had some vulnerability because we bill about $30 million a year in software support, certainly a much smaller number than before, when the infrastructure outsourcing business used to are 400 million a year. Now we do 30 million a year in that cat category. So I would expected if they had filed bankruptcy, which fortunately they didn't yesterday, that we would have had some accounts receivable exposure of about 7 to $8 million.

Ok. Then lastly, can you just talk about -- obviously we know what the broader geographical pressures are as far as SARS, war, so on and so forth. Could you just maybe dig down a little deeper and just talk specifics within your four major regions? I guess where you're expecting the most pressure from as the year progress?

This is Bill again. Certainly it's pretty difficult right now, for instance, to understand if there's an impact in North America travel around SARS as far as quantifying that. But let me give you some more specifics around the Asia-Pacific region. Keeping in mind that so far, SARS is really hitting hardest Hong Kong and Singapore. The load factors out of cafe Pacific have been 20 to 30% after taking about 40% capacity out, for instance. About 9% of our bookings are direct bookings in the STN business originate or terminate in Asia-Pacific. So again, this is a variation on the theme that Jeff talked about. If for the quarter, bookings are cut in half to Asia-Pacific, based on 9% of our bookings being in Asia-Pacific, that that would be a 3 or 4-cent impact from an earnings perspective. So again, that's a different scenario that's regional-specific. Also our Abakus joint venture in Asia-Pacific, we typically garner between approximately 2.5 million of operating earnings a month out of Abakus, and for March, those numbers were down about 25%, meaning that was about a $600,000 operating earnings hit in March, and our expectation would be that that would be worse than April. So that's a couple different levels of granularity in Asia-Pacific.

Ok. That's actually very helpful. Thank you, guys. I'll turn it over to the next caller.

Ok.

Thank you very much. Next representing CIBC World Markets, let's go to the line of Paul Keung (ph). Please go ahead.

Hi. Question on Travelocity. In sort of your other response to or your views on the recent agreement with Hilton Expedia, does that change all your views on your large chains ...

I couldn't hear the last part of that, Paul.

Your views generally on the Expedia and Hilton agreement, do you think you could actually see more agreements like that from Travelocity and others?

Well, yeah, and I think, again, this is back to what I was saying early earlier, that's rep representative with the type of deals we've been doing with hotel chains for the last six months. So what they announced was a connection of their system into the hotel reservation system of Hilton as opposed to the older allocation base model that they'd been using. So I do think we'll see more of it going forward. On the other hand, I do imagine that we'll see a balance between the use of this connection into the reservation systems and the allocation base model.

Ok. And then a question for Bill. I don't know if you saw it, Galileo announced continental signed up on their Momentum agreement. You also mentioned as a potential stabilization here in the near term in advance of potential deregulation. Do you really believe that pricing on a go-forward basis of DCA momentum is stabilized, and what if some scenarios it could actually destabilize and come down further?

I did seat announcement on continental. The challenge with momentum is that similar to the corporate connect announcement we made kind of middle of last year, it's a multilateral negotiation where many parties have to opt in to actually get traction in that kind of arrangement. That's not in any way disparaging the offer. Ourselves and our competitors are trying different things in the marketplace anticipating deregulation, but the pricing as far as the impact in the CRS business based on how I look at Galileo's pricing and our pricing on DCA3 is pretty similar.

Ok. Are there other scenarios that you think we could get more pressure on a 10% sellout reduction?

Well, I mean our offer as we sit here, when you look at our offer relative to our 2003 pricing is more like 13%, and I think that's a good number. I think it's a good clearing price.

All right. Thanks a lot.

Thank you very much, Mr. Keung. Next we go to the line of Chris Dudek (ph) with Morgan Stanley.

Hi. It's Chris. First thanks for the detail on the trends for the Sabre Travel Network throughout the quarter. I'm curious what you've been seeing since the close the quarter as the hospitalities interact, stabilize there a bit. Secondly related point, based on your historical experience, is there any line of thinking to say that travel demand could recover more quickly this time relative to, say, the desert storm or September 11th or is it too difficult to say and your visibility platform?

It's very difficult to say. But we have seen some improvement since things calmed down a bit a few days ago. Keeping in mind, again, that all four businesses have slightly different profiles, and so the Sabre Travel Network business which is more a proxy of the entire industry, improvement, slight improvement, and you've heard the airlines talk along those lines as well as far as maybe we've hit bottom. Whereas in Travelocity and GetThere, the uptick started sooner than the last few days, more like a week ago. Which goes to a little bit of the difficulty of gauging kind of recovery -- we plugged in the six six-month recovery wrap of Desert Storm from 1991. We started that at the end of Q2. Just because it's a proxy, and it's the only one that's out there. Hopefully we'll be wrong. Hopefully we'll be overly conservative, but we just don't know. And, you know, again, going to the demographics that we're dealing with, not that it necessarily should matter, but in 1991, there was no Internet as far as travel is concerned. There certainly was an Internet, but not on the travel side. Which goes to different profiles.

Right. Right. Ok. Unrelated question, if I could, on Travelocity. I guess one of the higher profile initiatives during in the quarter was the launch of the Travelocity business platform. I guess I'm curious, what percent of Travelocity's business currently has come from business constituents, and how much incremental revenue over the course of this year, for example, would you expect to get as you make -- as you tailor more specific offerings for those unmanaged business clients?

Let me talk to the latter part of that first. We haven't laid out as yet and we will in the coming weeks as we contemplate this time to get together with you all in late May or early June, we'll come out with more specifics on the Travelocity business and what we expect in terms of ref revenues there. The unmanaged part of the business, of our business, we estimate to be somewhere in the neighborhood of 30% of our bookings. Now, it's a little difficult to tell. That's just based on looking at the behaviors, the buying behaviors of our consumers. And also based on the fact that we've had about 600 corporate customers for the last couple years who are buying their travel on a single corporate card. We've had that offering out there since 1998. So we can see those bookings, we can look at buying behaviors of our customers and we estimate about 30% is unmanaged business travel coming through the site. And as we look at the marketplace, let me just come back to the size of market, as you look at the marketplace out there, and you really do have to try and (ph) (inaudible) on a lot of different numbers to come up with estimates on market sizes, but we do think the lightly managed market is somewhere in the neighborhood of $40 billion. That the unmanaged part of the market is also about $40 billion. So if you look at the larger piece of opportunity, and those are offline numbers, offline, unmanaged and lightly managed numbers today, and so you look at the larger opportunity and you could say it's, you know, up in the 80 billion range, but we're really focused with our offering on lightly managed and that's why I'm talking the $40 billion addressable market.

Ok. Great. Thank you. Very helpful.

And thank you very much, sir. We go to the line now of James Fuller (ph) with Thomas Weisel and Partners. Please go ahead.

hi. This is Julie in for James (ph). We have two questions. The first is your prior guidance had in spite of margin for Travelocity for the year of 10%. We want to know if that's still your plan, and second is, how much of your annual volume is covered under the new three-year contracts with the airlines?

I'll start at the back and move forward. Our current DCA3 contracts cover 15 to 16% of our bookings. Between United, U.S. and our other seven customers. As far as operating -- are concerned, prewar we were talking about an operating margin in excess of 10% for Travelocity. For full year 2003 as we sit here today, we're not ready to talk about operating margins in any of the businesses until we get our bearings better on the demand side, and again our expectation is -- our hope is that when we get together in late May, early June, we'll be able to be clearer on that.

Ok. Thank you.

Representing Legg Mason, a question now from Tom Underwood (ph). Please go ahead.

Yes, thanks. You touched on the Hilton contract with Expedia in terms of the connectivity. I was wondering what impact you think the exclusivity clause in that contract will have in terms of negotiating future merchant agreements for Travelocity inventory.

Well, first of all, it isn't clear that there's exclusivity there. If you read it, it's preferred and we spend time talking with Hilton. It's preferred not exclusive, so I think that there's still opportunity there. And there's also opportunity in the fact that while Hilton does have a good relationship with its franchised hotels, that there's opportunities there as well in terms of working with the independents and the management companies. So I think we'll see these types of deals. We'll see them in the future, and we'll continue to engage with both the hotel chains and the independents to make it work and work well in the market.

Ok. And then on a separate subject, the special item of $37 million from settlement with the travel agency subscriber, was that one of the two travel agency subscribers that were lost through an acquisition?

Yes.

Great. Thanks.

Thank you very much. Next let's go to Ryan, Beck & Co.'s David O'Kuhn (ph). Please go ahead. Your line is open if you are speaking, we can't hear you. Please check your mute key. We have no response. Let's move on then to our next participant in queue, Uhn Kim (ph). Your line is open. I beg your pardon? We have no response. If you can hear me, please requeue by pressing the 1 on your touch-tone phone. We do have a follow-up question from Paul Keung once again with CIBC. Please go ahead.

Quick question for Jeff on the ATSC. Quantify what the ramp is for the rest of the year as you start turning parts of that system off and into next year?

The cross-over happens in 2004. This is Bill. The bubble expense in 03 is $20 million or about 9 cents in earnings.

About how much of that is turned off by second, third and fourth quarter?

Well, we're running the system at full speed throughout the migration period. Most of.

Most of the travel agency customers are not coming in until second or third quashing. So I don't think you should think of it as turning all people off for 2003.

I got you. All right. Thanks.

Thank you.

That's a good question, though, Paul, and we haven't talked enough about our technology, and that will certainly be a center piece when we get together hopefully in the next few weeks. .

Great.

Thank you very much. Representing Salomon Smith Barney, a question now from David Richter (ph). Please go ahead.

Just want to confirm the EBITDA free cash flow gay goo dance you gave for the full year.

That includes the $37 million gain.

That includes it? Ok. Cool. Thanks a lot.

Thank you, Mr. Richter. Ladies and gentlemen, thank you very much for your interest today. Our final question comes from Richard Pearl (ph) with the First Manhattan Company.

Great to be a clean-up hitter. I'd like to go back to the beginning. Your dividends, I compliment you on that stock repurchase and acquisition, and I'm putting that together with your estimates of cash of about a billion dollars and low debt at the end of the year. I'm curious about the shelf registration of roughly a billion dollars in terms of acquisitions and just to get a general idea, do you feel that we're looking at a period of opportunity, and if so, can you talk a little bit about where those opportunities might be?

As far as -- I would only want to get as specific or ambiguous as saying travel commerce, and I apologize, but I need to be very careful talking about possible acquisitions. As far as a window of opportunity, we're just not sure. I would have anticipated that, frankly, early 02, late 01 would have been a window of opportunity, and we just never got to the point where we thought the deals made sense for our shareholders. So we'll see how it shakes out over the next several months. Again, hopefully the world will be settling down at the same time, and entities will be thoughtful of kind of where they go next and the opportunity to consolidate. But to your point, we have a strong balance sheet. We think it's a good time to have a belt-suspenders balance sheet. And we do not see the dividend decision as precluding us from stock buyback at all. But we'd like to get through this period.

Can I ask another question, please?

Sure. Go ahead.

It may be naive but it's from a portfolio manager. Could you, Bill, talk a little bit more about your view of the airline industry in general? I mean, it's great that you have these three-year deals with U.S. air and United. I just think in terms of, you know, the lineup for bankruptcies, the number of low-cost carriers, I think of Jet Blue, and what this does to your view looking forward of the opportunities in an important segment of your business.

Yeah, I always want to be careful here because I'm not an airline guy or airline expert by any means, but certainly as we go through this process and some of the airlines go through the car wash of bankruptcy, short of an industry restructure, we don't see a lot of change. Most of our businesses are transaction-based, and certainly the largest carriers in the U.S. will continue to -- for instance, the largest five were -- I believe 75% of the lift last year were like 71% of the lift this year. I need to update those numbers as we go through this interesting period and facts are less reliable when demand is being hammered as demand is being hammered, and certain routes in particular are really being clobbered whether they be Asia-Pacific or whatever as I speak. But I think short of a dramatic restructuring of the industry, I don't see our strategy being altered.

Thank you very much.

Thank you, Mr. Pearl. I'll turn the call back to - for closing remarks.

Thanks. Appreciate all of you being with us today. Let me close by stating the obvious. Certainly all of our businesses are suffering in varying degrees from the environment that we're in right now for the reasons we've pointed out numerous times during the call, but we are staying on track with our strategy, or our confidence in long term growth. Certainly our dividend announcement is a reflection of that, and we look forward to talking more about our strategies and financials in the near few tour, and we hope to see you then.

Your host is making your call available for replay for two weeks, starting at 1:30 p.m. April 17th all the way through 11:59 p.m. May 1st. You may access AT&T's executive replay service by dialing 1-800-475-6701. At the voice prompt, enter today's conference I.D. of 6814. International participants may access the replay as well by dialing 320-365-3844. Conference I.D. of 681479. That does conclude our earnings release for this quarter. Thank you very much for your participation as well as for using AT&T's Executive Teleconference service. You may now disconnect.