Sabre Corp (SABR) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, or good afternoon, and welcome to Sabre incorporated second quarter 2003 earnings conference call. Now, at this point, all of your phone lines are muted, or in a listen-only mode; however, after the presentation today, there will be opportunities for questions and those instructions will be given at that time. Now, just as a note, if you should require any assistance during the conference call, press star then zero on your phone keypad. As a reminder, today's call is being recorded and with that being said, here with our opening remarks is Vice President of Investor Relations, Ms. Karen Fugate. Please go ahead, ma'am.

Well, hello. Thank you for joining us today. I'm here with Bill Hannigan, our Chairman and CEO; Jeff Jackson our Chief Financial Officer; and Sam Gilliland, President and CEO of Travelocity. Bill will review highlights for the quarter. Jeff will review our results in more detail and Sam will provide an update on Travelocity.

Before I get started I would like to remind all of you that some of our comments on matters such as forecasted revenues, earnings bookings, operating margins and cash flow, specific contracts or business and trend information would constitute forward-looking statements. These matters are 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 10-Q filing with the SEC. The company undertakes no obligation 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 press release and on our web site at Sabre-holding.com/investor.

Now I will turn the call to Bill.

Thank you, Karen. This was a certainly a very difficult quarter for industry. The war in the Middle East and SARS combined to hammer travel demand once again. (Inaudible) in early April our Sabre Travel Network experienced days of global business bookings volumes down by more than 30%. In late April we had days with year over year volumes dropping by more than 70% in the Asia Pacific region when SARS was added industry maladies.

The good news is we saw a healthy rebound during the back half of the quarter. By the end of the quarter our demand numbers albeit in a constant state of flux were once again returned to prewar levels. During the analyst conference, held on June 9th in New York, we spent a great deal of them on the TSGwide strategy and specific strategies and business models of our core models. We laid out the markets where we compete, where we intend to compete, and we talked about leveraging our assets to ensure continued leadership. We gave numerous and specific examples of how one and one can equal more than two.

For instance, combining the industry leading get-there capabilities in the policy based booking tool arena with a brand, reach and customer service of Travelocity, to create Travelocity business. Speaking of Travelocity, we've been saying for sometime that the first six months of 2003 were a critical period for us. It was all about putting the building blocks in place to spur our next phase of growth.

During the second quarter key milestones were indeed met and Sam will talk about them in a couple of minutes but I want to highlight a couple of them. I will start with Travelocity's progress in the the merchant hotel area. At the start of the year, our stated objective was to have 4,000 hotels operationalized in the Travelocity merchant hotel program by the end of 2003. We surpassed that goal more than six months early and as of last week, the property count had climbed north of 5,000.

Late last year we announced that Travelocity would launch its dynamic packaging, Travelocity Total Trip, during the second quarter of this year. Mission accomplished. Many of you were able to road test total trip during the analyst conference. More importantly, since the end of June, our customers have been able to experience total trip and our results are beginning to reflect that. This capability makes it easier for travelers to create a customized travel package that saves them money and best fits their needs while at the same time enabling to us promote and sell higher margin merchant products.

Our investments are beginning to pay off. In fact we believe 2003 is such an important year for market positioning that we will continue to invest strategically and opportunistically in Travelocity. If that ends up translating into a break-even for the combined Travelocity and Travelocity business P&L for 2003, then sobeit.

During our June conference, we also provided an update on the CRS rule making process underway at the DOT and what we're doing about it in the marketplace. Specifically we talked about the status of the Sabre Travel Networks DCA three-year offer -- an offer created in anticipation of deregulation. At the time of the conference, there were 12 airlines in our program, including two of the big six. Those being United Airlines and U.S. Airways. Those 12 carriers represented approximately 15% of our direct global bookings.

Just six weeks later, we're pleased to report the number of participating carriers has grown, and that DCA three-year program now includes five of the six U.S. majors. In the past two days we have announced the signings of Delta, Continental and Northwest. These contracts secure a long-term commitment by the carriers at the highest participation levels in exchange for a discount of approximately 12.5%. The arrangements also guarantee broad access to all fares, seats and services to all Sabre Travel Network outlets, both offline and online. No other GDS comes close to having the level of product now available through our travel network company.

With the recent additions of Delta, Continental and Northwest the percentage of bookings all program participants represent has blown from 15% of our direct global bookings to approximately 36%. The road has been paved for industry deregulation.

Overall the program brings long-term pricing stability to the industry and reinvigorates the value proposition for our airline customers and the travel agency subscribers. These agreements are a good investment but they have not come cheap and we need to trigger a change in the marketplace behavior as our GDS competitors cut similar deals with the carriers. Incentives on a per booking basis are no longer growing at the 30% year-over-year clip of a few years ago but they are still growing in the low to mid-teens. That has to change. Beyond incentive expense, these deals, as you would expect, will also require us to be very aggressive in how we think about all of our costs as we head into 2004.

Now, a couple of comments on the status of deregulation itself. The process is not a pretty one, but we may be approaching the end. The DOT started this process with a set of proposed rules that were anything but deregulatory. In fact, the notice of proposed rule making was a laundry list of convoluted rules that would have harmed just about every player in the travel industry, including consumers but we believe the momentum has shifted during the past several months as the various stakeholders including Congress have weighed in. In addition to the Congress weighing in we're pleased to see the Department of Transportation, excuse me, the Department of Justice, filed comments in early June, supporting deregulation. And the Federal Trade Commission rejected the legal foundation of the Department of Transportation's proposal for continued regulation. We have been a proponent for deregulation since the beginning of this process and are pleased to see a growing consensus that open competition will be the best recipe for the industry and consumers.

In our "Get There" business, we transferred 50 customers to the newly released product including some of our largest clients such as Chevron Texaco. Remaining "Get There" direct corporate customers will upgrade to release six in phases through the summer and the fall. While this is very positive news and release six will widen our already extensive lead in the corporate online booking arena it did slow corporate transaction growth during the quarter. As is typically the case with a next gen upgrade, new customers have deferred implementation and some current customers are delaying the adoption programs until they have been transitioned. Additionally Get There signing, multi year extensions to the agreement with American Express our largest corporate distributor. And in our Sabre Airlines Solutions business we continue to win a number of significant contracts. One of the key ones this quarter was signing Quantas for the Sabre air flight suite of planning and scheduling solutions. There this continues to grow despite a challenging sales environment as our airline customers and prospects scrutinize every dollar spent.

Let me turn the microphone over to our CFO Jeff Jackson.

Thanks, Bill. I would like to review with you the financial performance for the second quarter, as well as our outlook for the third quarter and full year and I will start with total company revenues and earnings per share.

Total company revenue for the quarter was $507 million. Earnings per share on a GAAP basis were 5 cents compared to 47 cents in the year ago quarter. Earnings per share excluding special items were 23 cents compared to 57 cents in the year ago quarter.

Now, I will move on to revenue and operating metrics broken out by business unit and let me start with Sabre Travel Network business. Sabre Travel Network had revenue in the quarter of $379 million, a decrease of 10%. This decline was primarily the result of a significant decrease of bookings immediately following the start of the war on top of already depressed booking volumes. Total global bookings processed in the quarter were 89 million, a decline of 16%.

As you may recall, in the midst of the conflict in the Middle East, and SARS, we produced a scenario that was built around travel transaction volume hitting a low point in the second quarter, and returning to prewar levels by the fourth quarter. In June, bookings returned to prewar levels and so far, July is trending along the same lines. Breaking down total global bookings, U.S. bookings declined 15%, international bookings ended the quarter down 18%, as Latin America and Asia Pacific continue to be under pressure due to geopolitical issues and the impact of SARS. Air bookings entered the quarter down 18%, non-air bookings were down 5%, and finally direct bookings were down 14%.

Moving on to Sabre Travel Networks booking share. Worldwide booking share made year-to-date is 35%. This is down 2 points due to the loss of two agency customers acquired by a GDS competitor last year. However, we are on our way to achieving year-end share of 36%. On a regional basis made year-to-date, North America was 45%, Europe Middle East and Africa was 14%, Latin America was 51%, and Asia Pacific was 50%.

To highlight some of the changes for the first quarter, in Latin America, we gained one point of share as a result of the progress we made in converting agencies from a competitor that pulled out of certain countries in that region. And in Asia Pacific, it appears we lost some share; however, the reality is this is due to large volume swings from the impact of SARS, and economic conditions in Japan, and not losses to competitors. As the travel market recovers we expect our share to return to earlier levels in this region.

Now for an update on Sabre exclusives. We now have 1,800 hotel properties signed up in 189 cities. There are more than 14,000 agencies in the U.S. and Canada that have access to Sabre exclusive product. These agents booked 40,000 room nights during the quarter and over 70,000 year-to-date.

Total -- now, I will move on to Travelocity. Travelocity's industry leading membership rose by more than 1 million to over 40 million members during the quarter. Gross travel booked was 979 million for the quarter, growth of 7.6% over the last year. Travelocity has total revenue of 91 million, growth of almost 20%. Total revenue as a percent of gross travel booked for the quarter was 9.3%, up from 8.9% in the first quarter. Transaction revenue was $71 million, growth of 29% for the quarter. Advertising revenue was $10 million, a decrease of 17% and worse than we expected driven portal partner advertising shortfalls.

Other revenue for the quarter was 10 million, a gross of year-over-year of 14%. Now, let me break down transaction revenues further. On the air side transaction revenue grew 19% and non-air transaction revenue, which is made up of hotel, cruise, car, vacation, and last-minute grew 42% year-over-year and 20% sequentially.

Taking our non-air transaction revenue one step further our cruise, vacation and last-minute category grew 74% year-over-year and 13% sequentially. Primarily due to the growth in last-minute deals and cruise.

Total hotel revenue grew 34%, driven by a healthy 81% increase in our hotel merchant revenue. Our hotel merchant revenue as a percent of total hotel revenue was 63%. Our own merchant products made up 41% of the merchant revenue. Almost double what it was in the first quarter. Total merchant revenue is a percent of total transaction revenue was 25% for the second quarter up from 22% in the first quarter.

Now, let me turn to Travelocity's hotel metrics. The launch of Travelocity's merchant hotel has helped drive our merchant hotel volume to 46% for the quarter on track to reach a year-end expectation of 60%. The number of Travelocity merchant hotel bookings grew 110% sequentially. The efforts to push merchant hotel inventory over published are working. The published mix is down 15 points and Travelocity's merchant product is up 14 points. And to wrap up on Travelocity, Travelocity revenue performance was below our prewar expectations. Site visits and bookings were dampened by the portal partners' performance relative to the metrics at Travelocity.com. We are working closely with these partners to improve the output of those relationships.

For the GetThere business, revenue for the quarter was $12 million, representing a decrease of 6% and total transactions processed was more than $2 million, an increase of 9% from last year. On the corporate side we saw revenue growth of 24% for the quarter. Revenue from corporate trips, which represents about three-quarters of the total corporate revenue, is in line with corporate trip volume growth of over 40%. Corporate transactions include bookings from our distribution partners which continue to accelerate and nearly doubled over this time last year.

As Bill said, the migration to the new platform, dampened corporate transaction growth, as existing customers postponed adoption plans. And new customers deferred implementation until the platform was available.

On the suppliers side, revenue declined 56% year-over-year, primarily driven by the loss of two supplier customers over the last year and the renegotiation of the UAL deal. We will continue to see this year-over-year decline for the remainder of the year.

And finally second quarter revenue for Sabre Airline Solutions was $54 million, an increase of 5% compared to $52 million in the year ago quarter. This revenue growth was due from solid performance from our products and services group through a mix of new business and organic growth from key customers such as Southwest Airlines and PSA.

Now I will turn my remarks to Sabre Holdings' expenses. Operating income and margins for the second quarter. Starting with expense. Total company expenses on a GAAP basis increased 12%, and on an adjusted basis increased 8% year-over-year. A portion of this increase is attributed to investments in technology, product and our online businesses. In addition, we had an opportunity to renegotiate a portion of the EDS outsourcing agreement. As a result, $20 million in savings which would have been received in 2003 will now be received in 2004. This had a $5 million impact on our second quarter results. Overall, this is a positive net present value investment for Sabre Holdings.

As expected, Travelocity incurred an operating loss in the second quarter that was similar to the first quarter loss on both a GAAP and an adjusted basis.

And lastly, operating income for Sabre Holdings on the GAAP basis was $40 million, resulting in an 8% operating margin and operating income excluding special items was $54 million, with an operating margin of 11%.

Now, turning to other financial data. Our adjusted EBITDA for the second quarter was $71 million, and GAAP net income was $7 million. Also we ended the quarter with a cash and marketable securities balance of $966 million and had debt on the balance sheet of $613 million. This includes the carrying value of the company's public debt of $445 million, and a $168 million capital lease obligation related to the refinancing of our headquarters' facility. We incurred a one-time loss of $28 million in connection with this refinancing. The going forward pretax impact of the financing will be approximately $1.6 million increase in interest expense and a $200,000 increase in depreciation expense.

Now I will turn my remarks to outlook. For the third quarter we continued -- we expect revenue to be down 3% to up 4% year-over-year and we expect earnings per share on a GAAP basis in the range of 15 cents to 20 cents and EPS, excluding special items in the range of 21 cents to 26 cents. For the full year, we expect revenue growth on a GAAP basis to be down 2% to up 3%, and revenue growth on an adjusted basis, to be down 4% to up 1%. Full year earnings per share on a GAAP basis would be between 75 cents and 85 cents and EPS, excluding special items, are expected to be range of 95 cents to $1.05.

With the impact of the new DCAA three-year deal we expect pressure at the high end of these ranges. Full year adjusted EBITDA will be greater than 330 million and GAAP net income would be be greater than 107 million. Free cash flow would be greater than 180 million and cash flow from operations would be greater than 260 million. And we would expect to finish the year with a cash balance of approximately $1 billion after paying three quarterly dividends.

The total company outlook for both the quarter and the year includes several assumptions I discussed earlier. Assumes only the 16 DCA three-year contracts we have today, it includes the increase in interest expense in D&A as a result of the capital lease. It includes the impact of the EDS contract renegotiation and assumes we will continue to seize opportunities to invest strategically and opportunistically in our businesses.

Looking at the outlook for the year by business unit, Travelocity revenue growth is expected to be greater than 30%. We expect significant improvement in the back half of the year in earnings; however, full-year operating margin on a GAAP basis is expected to be negative mid single digits and on an adjusted basis Travelocity will be be approximately break even. Capital revenue growth is expected to be approximately 10%. Full-year operating on a GAAP basis expected to be in the high negative double digits and on an adjusted basis we will cut operating losses by a third.

For corporate transactions our aggressive prewar forecast of more than 70% growth now looks more like 50% due to the impact of the war, slower than expected recovery in corporate travel and the delayed launch of release six. Sabre Airlines Solutions approximately 10% revenue growth, and operating margin in the high single digits on the GAAP on an adjusted basis.

And finally we expect Sabre Travel Network revenue to decline about 6% on a GAAP basis and about 8% on an adjusted basis and have operating margins in the mid to high teens, on both a GAAP and an adjusted basis. We also expect total global bookings will be down 11%, and total direct bookings will be down approximately 10% year-over-year. For the second half of 2003, the impact of the three new DCA three-year carriers Continental, Northwest and Delta is in the range of $9 million to $13 million in revenue, and this will fall straight to the bottom line.

Now I would like to turn it over to Sam.

Thanks, Jeff. As Jeff has covered the financial aspects of the business, I'll provide you with an update on our progress with initiatives over the course of the quarter. I told you back in January that the best short-term indicators of our success were those initiatives and capabilities we committed to deliver throughout the year and that you would see financial improvements in the back half of the year. Well, the second quarter was huge in terms of milestones accomplished. Let me briefly cover them.

I will start with Travelocity business. We announced this offering in April and have made great progress since then. We have the best in class offering utilizing GetThere's market leading customer proven technology, backed by our industry leading call center capabilities. And fantastic progress on the sales front with literally dozens and dozens of small to medium-sized businesses already signed up for the offering, which we plan to implement in the coming weeks. Moving on to the hotel business.

As you heard before on June six, we eclipsed our year-end goal of having 4,000 hotels and last Friday we blew past the 5,000 hotel mark. In the process, we added new brands to our already impressive portfolio of hotel partners. Choice, La Quinta. U tell, along with independently owned and operated brands like Preferred Hotels and Resorts, Sterling Hotel hotels and resorts and Summit Hotels and Resorts. We now expect to have more than 6,000 hotels operationalized by year-end. Given our goal to drive significant incremental demand and share to our merchant hotel partners we continue to be very thoughtful about who we add to our program, as we approach an optimum number of hotels. And we continue to expect our merchant hotel mix to grow throughout the back half of the year from its current level of around 46% to about 60% by year end.

In our car business, we implemented as planned our new car shopping path in April. This new shopping technology complements the total pricing capability we introduced late last year, further emphasizing our "know before you go" philosophy with consumers. We continue to expect growth in the high teens in this business this year.

Moving on to dynamic packaging. We committed to implementing our packaging product called Travelocity Total Trip in the second quarter and we did. Along with a new home page that highlights this fabulous new capability. And I must say we're quite pleased with the result. We've really raised the bar for consumer experience and flexibility. Consumers can choose to book their air or hotel first. They can choose their airline seat from a dramatically enhanced seat map capability. They can choose their hotel based on AAA ratings, Travelocity ratings or consumer ratings and again for those those who want to know before they go, they can choose their specific room type, a non-smoking room with king bed as an example.

Our last-minute business continues to exceed expectations delivering about 80% growth year-over-year in the second quarter, sequential growth of about 30%, putting us on track to deliver full growth in excess of the 80% projection in January.

And finally our cruise business. It grew over 85% over the prior year and we now expect it to grow about 50% for the full year up from our January forecast of 40%. And consistent with our historical innovation in this market, today we're launching flight packaging capability in our cruise shopping path, giving consumers choice of cruise and flight options in the same easy to use booking package. Another industry leading innovation and a great value for consumers and suppliers.

It's this type of innovation in Travelocity that compels new partners such as U.S. Airways to participate, as announced earlier this week, in the Travelocity partner network. Customers of usairways.com will soon have the benefit of the same great values and ease of use that Travelocity customers enjoy for cars, motels and last-minute deals. These types of relationships build upon our deep experience providing private label booking capabilities to the likes of AOL, Yahoo and many other airline and hotel supplier web sites.

In conclusion, the Travelocity team has made great progress and delivered and even overdelivered on its commitments made this past January. As Bill indicated earlier, we put a good number of the building blocks in place in the first half and naturally will go through our share of tuning in the back half given that we've changed out many elements of our store front. And we'll continue to make the investments and necessary enhancements in the product offering to drive value for suppliers and consumers.

With that, I'll turn in back to Karen for Q&A.

Thanks, Sam. Brent, please open the lines for Q&A.

Indeed I would be happy to. If you have any questions or comments we invite you to queue up at this time, simply press star and then one on your phone keypad. You will hear a tone indicating that you have been placed in queue and you may remove yourself from the queue by pressing the pound key. Once again to ask a question, please press star and then one on your touch-tone phone.

Representing Bear Sterns our first question comes from the line of James Kissane. Please go ahead, sir. Thanks.

Bill and Jeff, I'm trying to reconcile the guidance. Can you quantify or rank the factors that are holding back the earnings? If you can put some numbers around it.

Yeah, sure. When you think about the guidance that we even hesitate to call guidance in April, based on what was going on in the world, based on where we came out from a travel network perspective for bookings, you would have a -- a couple pennies of up side, from an earnings perspective. Certainly the offsets were the renegotiation of the contract with EDS. Also we had some unique leverage loss, I will call it, and it was, you know, just south of a penny but a penny nonetheless in that unique data process requirements of what was going on in April. What I mean by that, and I think we talked about this before, that roughly speaking when you think about an incremental point of bookings we think in terms of around 70% of that dropping to the operating earnings line. Just goes to the leverage in the model.

For the quarter that number was more like mid-50s because of the data processing intensity of the sched changes in Asia, at the same time people we'rent booking and getting on airplanes. We have never seen short-term schedules taken down like we saw for the carriers in Asia Pacific and SARS. And I talked about volumes dropping by more than 70% on more than one day in late April time frame. And also in North America right now, it's -- it's a unique set of circumstances around the load factors. You've seen load factors north of 80%, which is -- it was pretty darn high, which cranks up again the data processing intensity of looking for that last seat availability. And we talked earlier and I think you referenced, Jim, around the Travelocity and other one-timers.

Okay. And just following up on that when would you expect Travelocity to break even now? And also get there? Because I understand the investment is at Travelocity but it seems like the competition is running real fast. You can keep investing forever. I mean when do you draw the line and really push for, you know, bottom line results.

Right, lines are being drawn every day at the highest level. We'll see significant improvement in operating margins in the back half of the year, but we are targeting full-year breakeven from an operating margin perspective, assuming that we will have, along with the strategic investments that we've already keyed up, we will be assuming place holder for a couple of opportunistic items as well. That's at Travelocity. We talked about how important it was for putting the building blocks in place to take us to the next level from -- and so there was certainly catchup involved in that. We've been open about that.

As far as GetThere's concerned you have lots of moving parts. On the corporate side, you have the drag of the supplier side of the business. You may remember that when we -- when we combined GetThere and BTS two and a half years ago, that north of 60% of the revenues were open the supplier side. That's now more like 16% so that continues to drag down the overall revenue growth of of GetThere.

On the corporate side, the -- the corporate travel environment hasn't recovered like the leisure travel environment has at that point. We talked about the -- the platform changeout, which is certainly very good news and gives us the opportunity to extend our lead but in the meantime it does dampen transaction growth. We talked about the new customers waiting to implement on the new platform so they wouldn't have to go through migration and current customers thinking about when they bring out the next wave of adoption programs. We have adoption running at 20% across the portfolio of customers which talks to the upside of GetThere. I think there was one other point but --

Okay. Thanks.

I'm sorry, Jim, I was going to throw in the fact that prewar when we established the plan for 2003, last December, we were expecting greater than 70% growth on the corporate side. Growth was dampened in Q2 and took us to a 40% kind of number but we still expect full year to be north of 50 and hopefully we're being cautiously optimistic as we go through the migration path with our customers.

Excellent. Thanks Bill.

Thank you very much Mr. Kissane. Next representing Goldman Sachs. A question from the line of Gregory M. Gould. Please go ahead.

Thanks. Just a quick clarification. The DCA impact of 9 to 13 million, that was for calendar 2004?

2003.

Okay. Sorry. And can you -- is it possible to handicap the potential for additional DCA agreements in the second half of this year to be announced?

Greg, a couple of items. It's -- it's -- to clarify the number that Jeff gave you is for the back half of the year. We already had built into the numbers some of what we were doing with U.S. Airways and then United Airlines so, as you can tell by us not changing the guidance, we're absorbing the hit of DCA coming on through the year, and I talked about 36% of -- of the population of bookings being covered at this point. My expectation is that we'll exit the year with a number in the -- in the 40s, and we also will be thinking about pricing actions and that kind of -- a more traditional view as we head to the back end of the year as well.

Okay. And on incentives, any trends there, on what's being given to travel agents.

Well, the trends are down, certainly, year-over-year on a -- they're down at an absolute level for sure. But certainly the industry has something to do with that. On a incentive per booking basis, they are also down from previous years when it was numbers in the 30s year-over-year a couple of years ago but we have to as an industry take the next step. It -- this is very valuable content that we have secured for our travel agencies subscribers, certainly in the Sabre Travel Network business, when you're talking about 36% of the population being covered, as far as airlines in the system, and you think about the -- beyond fares content from a seats perspective, services perspective, on and on and on, the model has to change. Not only from a pricing side, but also the incentives side. I think that, you know, we have typically have had fairly rational competitors and I expect that to be true as well and I expect that they will be signing like deals and you might have seen that yesterday that one of our largest competitors actually rationalized their offer to look more like ours and, again, I think that is what you expect in a -- in a rational marketplace.

Okay. Thank you.

And thank you very much, Mr. Gould. Next in queue is Paul Keung with CIBC World Markets. Please go ahead.

I guess the same question as Jim, is just that I did not have the expectation of raising numbers upwards. When I did the math, I'm looking at DCA taking on $5 to 6 million in the back half of the year going straight to the bottom line and then the EDS comment earlier and then the booking went down to 11. So when I do the math, I actually have, you know the possibility of the EPS down, although outlook improved because the DCA agreement. I'm wondering what are some of the positive effects to keep the numbers where they are?

Right. The only -- the only item comment I would make, Paul, is that it was -- it was more like -- more like 13 to more like 10, versus more like 12 to more like 11, but right. Directionally very --

Okay. And then on Travelocity, look at the numbers there, no reasonable doubt to make that -- I see you maintained the revenue growth that would probably subject 50% revenue growth over the balance of the year but a swing in profitability of down 12 to call it more than 12. What -- what is, I guess -- does that make -- let me -- am I making numbers make sense to me, speaking out loud here? And what are some of these to believe that could happen, it's front loaded cost in the first half of the year won't be in the back half?

Paul, try that one more time. I'm sorry. I missed the question.

Yeah. Okay. Looking at your Travelocity guidance, you're saying revenue growth of over 30%.

Right.

And the growth in the first half of year is going to grow 50% in the back half. Meanwhile the operating income of Travelocity is down about $12 million through the first six months.

Right.

But you're suggesting that will be break even by year end. So it suggests more than $12 million over the last six months.

Correct.

So when you think about incremental revenues, and profitability, that's a significant swing and I'm trying to understand how you come up with --

That's correct.

-- come up with the 40% margin within Travelocity.

We spent a lot of money in the first half, is the short answer for that one.

Okay.

We talked about those were expensive building blocks that we put in place. From a technology perspective and from a deal perspective at Travelocity.

Again, Paul, this is Sam. I think the other thing you would expect, just as we saw in the first half, an improvement in revenue as a percentage of gross revenue, so you will see that, just based on the fact that we're improving our overall net revenue numbers, as a percentage of gross because of our entry into the merchant model hotel market, our merchandising of those hotels versus published. So you just see, you know, better business model, obviously.

Okay. Good. It all looks consistent when I have -- then the last question, I will get there, that's the only outlook I see is the change went from a 20% to 10%, what are some of the factors behind that?

Again, the -- I think that the -- the same answer I gave earlier, Paul, around what's going on on the supplier side, versus the corporate side, we expect full year on the corporate side to still be north of 50%, but the supplier business shrinking at 56%. I think that was the number, Jeff is just dampening the heck out of the top line growth.

I missed that.

I also will throw in the -- our FSO offering at GetThere --we'll get there by taking the revenue per transaction up from the sixes to more like a 20 on a transaction basis for the full service option customers. The sales aren't going as well as we would have liked. The sales cycle has been longer. We have a few customers but we don't have dozens of customers and that's part of the mix as well.

Okay. Okay. Thanks a lot.

And thank you very much. Next question from the line of Tom Underwood with Legg Mason. Please go ahead.

Thank you and a couple of questions. One was just wondering if you could comment on what portion during the first half of the year of Travelocity's gross bookings were packages and now that you have dynamic packaging how would expect that to trend in the future. Any goals you have, etc. And then two, in gross bookings in affiliate channels versus direct. What are we seeing in terms of gross booking growth in Travelocity, versus the AOL, yahoo, other affiliated combined things.

Yeah, this is Sam. How are you are you doing this morning?

Pretty good.

I'll talk to the second one first and that is as Jeff had commented we haven't seen the traffic or the bookings from our affiliates that we had planned on in the first half of the year so we're work working closely with them to improve that situation. So you would see that growth in travelocity.com actually closer to our expectations while the growth in the affiliates certainly below our expectations but I won't -- I won't get into any more specifics on that.

Could you just say if it was positive or not in the affiliates?

It was not. It was not -- it was not as planned. It was not positive versus plan. And that's all I would be willing to say at this point.

Okay.

So -- so that's the first piece. We haven't really commented as yet on the percentage of bookings that we expect to -- to drive through our vacations or package product offerings as yet, except to say that there is a template out there, where you might expect to see packages as a percentage of overall bookings in the range of 20 to 30%. Now, we -- we have not built that aggressive of a plan in the back half of the year but those are the types of of numbers that we will expect as we get to steady state with that product offering.

Great. Thanks a lot.

Next we go to the line of Jeff Lawson with Lehman brothers.

Hi, it's Jeff Kessler calling in. with the prospects for what you call more rational pricing from your -- from the competition with regard to some of the DCA deals out there, I'm just wondering what you see as far as revenue growth for the industry in the next couple of years. Are we heading for a period of flatness if everybody gets involved in these agreements?

Yeah, we haven't talked about -- we haven't given the '04 guidance yet but I think that's a logical assumption, but you need to keep in mind -- certainly we keep in mind -- market share, market growth, we expect the market will be growing in '04 for the first time in several years. We think about pricing actions beyond the discounting that's currently taking place to secure the long-term contracts because we don't expect all the carriers will join the programs. And we think about new products. So the five -- the five levers at least as we think through our '04 planning.

Okay. Thanks.

And thank you very much, Mr. Kessler. Our next question comes from the line of Chris Gutek with Morgan Stanley. Please go ahead. And Mr. Gutek, if you are speaking we can't hear you. Please check your mute key.

Sorry about that, had the mute key on. I want to comment on the earlier question regarding the incentive payments to the travel agents. In the press release, two releases you put out over the last couple of days and now the airlines DCA three year. You said because you thought you were providing more content to the travel agent you might be able to lower the incentive fees. From a contractual perspective what right does Sabre have to actually renegotiate lower incentive fees with the travel agents. What gives management the confidence that those incentive fees will flow?

That's a very good question. It all goes to timing. We average 3 to 5 year contracts we average therefore reupping our base about a third per year, and so you're right, it -- it will take time to change the pricing in the marketplace, assuming that the model stays the same and I wouldn't make that assumption either. As we think about rolling out new products in the deregulated environment in our travel network business, the -- the value proposition with our travel agency subscribers can change as well. So, if, for instance, sell x product here, your incentive this, if you don't sell that product your incentive is y. So I do think that there are opportunities in the deregulated environment, the changing product offering and to change the -- the economic model between us and our subscribers, maybe not overall out of the gate but with the next set of product. Overall, it will take time as our contracts come due. That's correct.

Okay. And in the last couple of of press releases as well, the DCA three-year pricing is now being offered to domestic airlines for international travel, Europe, the Caribbean, et cetera and I guess I was reading between the lines in the release that you may be considering offering DCA three-year pricing to international-based airlines as well. I'm curious is that correct and if so, what would be the motivation to offering the price discounts to global airlines?

I will make a quick comment and kick it to Eric Speck our Chief Marketing Officer. We're in talks with several of the flag carriers in Europe. And one of the opportunities we want to take when we think about our cost structure and our cost structure advantage because of our share will be to put the heat on the other competitors and certainly there's a significant group in Europe that we won't let off the hook. And we'll be thinking about that real seriously as we make our offers in that marketplace. But go ahead, Eric.

The only thing I would add to that, Bill, is there is -- the European community is going through a regulatory review as well. It's -- it's possible that there will be forms of deregulation there as well, and I would note that we've extended the DCA program to the Caribbean, and to Europe, but those discounts are off of -- are calculated from the 2003 base, which went up.

Okay. And then finally on the same line of thinking, I think you guys have been saying recently, again in these press releases that you believe the channel shift and the mediation process should slow a bit as more airlines sign up for DCA three-year pricing. I guess my question is with a somewhat modest 12.5% reduction off of the distribution fees given how aggressively airlines are going after their cost structure, why do you believe that degree of cost reduction will meaningfully slow the drive away from channel shift?

It goes to the offer so, it's beyond the discount. It goes to the content is now available in the Sabre Travel Network. It not available, for instance, in our competitor networks but I suspect the competitors will be stepping up over time as well. So if you are Running an airline, you think about channels of distribution, costs of distributions and which segments you are reaching with that product and making sure you are as competitive as the next guy. And I think all of that adds up to a -- a value proposition that would translate to dampened channel shift because the airlines would be less incentive to think about one channel as higher cost, irrespective of the fact that it was the highest yielding channel, versus other channels and so I think that is certainly in keeping with our discussions with the airlines.

Okay. Great. Thank you.

A bit of equilibrium We talked about equilibrium in our strategy discussions in the past and certainly we believe that with the anticipation of deregulation, the clearing price that we had found with our carrier customers, the airline customers created more equilibrium in the marketplace.

Great, thank you.

The next question comes from the line of Scott Barry with First Boston.

Edward Loh for Scott Barry. One, can you provide a breakout of operating profitability for the four segments and then second, either for Sam or Bill, you guys attributed the -- some of the underperformers over Travelocity to a portal relationship. I want to see if you can elaborate on that and what you guys are doing to sort of improve that relationship on a going forward basis.

The first part of your question is the -- the profitability will be in the -- in the queue.

Okay.

Sam, do you have the -- the back end of the question.

The second question was related to portal relationships. You know, we really are not going to comment further on. That I think we set up a plan for the year and we're under performing that plan with our portal relationships and we have good relationships with our portal partners. We're working closely with them and we plan to get those back on track.

Good relationships and good discussions around performance.

That's right.

In the last few days and weeks.

Thank you.

Thank you very much, sir. Representing Millman, a question from Michael Millman.

Two questions. One, could you reconcile the GDS revenues which were down 10% with the bookings that were down 16% taking into account the DCA and I thought that revenue increases were somewhere in the 2 to 3% range. And secondly what are the share on your assets -- to Jeff Kessler's question that you expected the market to grow if you were talking only bookings or that was in revenues as well.

If you could help us -- I'm having a hard time receiving you. I didn't get the back end of the question. I think I -- I heard the front end of the question which was the direct bookings down relative to total bookings down. Is that what the question was?

No it was revenue.

Right.

The direct bookings were down 16%. Revenues were down 10%. If you could reconcile those numbers.

Yeah, direct bookings were down 14% versus revenue of 10%. Which goes to pricing and channel.

So even with DCA, the -- you could say that prices were up better than 4%?

Part of it is the -- how much of the DCA is in Q2, and as we talked before, for -- as we entered the quarter, DCA represented less than -- less than 15% of the population of bookings, and certainly that will be growing over the back end of the year.

Okay. So -- so average prices were up better than 4%?

Approximately, yes. That's right.

And the second question was on Jeff's question, if when you said you expected the market to grow in '04, if that was revenue as well as bookings.

Yes.

Thank you.

You bet.

And thank you very much, Mr. Millman. Next we have a question from the line of Jerry Galant with Huberman Financial. Please go ahead.

Thank you. Can you state what the $5 air booking fee for Travelocity contributed to the second quarter and then comment on the reaction in the marketplace to that $5 fee.

It was -- it was a significant contributor to the growth in the quarter on a year-over-year basis but we're not talking about what the number is.

Okay. And I -- I -- I might have heard that Orbitz was considering raising it to $6 and if that's so, that seems like consumer acceptance is pretty strong.

We heard it and we've seen it but I won't comment anymore on pricing actions.

Okay. And the second question, American Express has announced that they are acquiring Rosenbloot travel. That's a significant Gallileo customer. Can you comment on what you see as the strategy for Sabre going forward with respect to that acquisition?

No. But certainly it will be interesting to see how all of that plays out.

Okay. Thank you.

You bet.

Okay. We do have a follow-up question, once again, James Kissane with Bear Stearns. Please go ahead.

I'm not sure if you mentioned this, Jeff but can you give us some numbers on channel shift or your sense for channel shift during the quarter. And the outlook for the sales in the next six to 9 months.

That hasn't changed from kind of four to five number that we've seen over the last three to four years, but it will be interesting to see what does happen over the next several months when we're -- since we're achieving critical mass with the DCA three deals from a channel shift perspective.

And what's your sense in terms of what drove all of these airlines in the past few weeks to jump on DCA? Have you, you know, put out that the pricing is going to change on DCA? And also there's obviously a glaring hole in terms of airlines that are not participating. Can you comment on that at all? It would seem like market share --

I'm not sure I understand the end of your question.

There's a very large airline that has not jumped on DCA and it would seem that market share considerations would kind of force their hand. Any comments on that?

Yeah, well, we'll see how that plays out. A couple of -- a couple of comments. These -- these negotiations have been -- have been longer than we would have expected and it's -- it's good to see trends.

I think there's a couple of things. One is the savings that have been sitting on the table now for six to nine months, also there is a -- I believe there is a network effect. These guys are fierce competitors with each other, and they need to think real hard about the content that is available from a competitor in the system, especially when you think about north American and 48% market share that we have, the reach of our travel network business. And we've always felt -- we've actually felt the energy increasing with our various airline customers as others signed on. And so certainly there was kind of a -- a building tsunami around the DCA three-year offer.

As far as the largest airline in the world is concerned we are definitely in -- in talks with that carrier. Another comment I would make is -- I will actually kick it to Eric to talk about because the economics of our offer have not changed for many months. It has been fairly intense negotiations taking into account the specific makeup of our various airline customers and their distribution strategies.

I would like Eric to give a couple of of for instances on that that have certainly weighed in on the timetable perspective.

The negotiations with these large carriers have been interesting and I would just conclude that they've been very large decisions for these carriers to make because in order to sign up for three years, the carriers need to get alignment within the organization on making long-term commitments and perhaps changing some of their previous directions as it relates to what they do on their web site, what they do in terms of their pricing, how they use pricing tactically in certain channels, et cetera. And so those have been interesting things to sort out and other issues have arisen in terms of internal tour operations and what about those fares and what about our international markets and international alliances and things like that. So it's been complex for these carriers to sort through. They have all been doing that since we came out with the initial offering with U.S. Airways about nine months ago. As Bill mentioned, the combination of sorting through all of those issues and the competitive forces at play, we have now gotten to critical mass.

Okay. Thank you.

Brent?

Yes.

We have time for one more question, please.

Very good, thank you Ms. Fugate. And the final question comes from Simon Porter with First Manhattan. Please go ahead.

I was just wondering if we might be able to talk about the revenue -- the trip metric of $9 that was talked about at the analyst day. Where that is now and where do you see it trending over the second half. Thanks.

Simon, this is Bill. We certainly expect that all of the work that we're doing on the merchant model, which it be in our travel network business, certainly our Travelocity business, and the revenue per transaction at GetThere from an FSO perspective, not to mention our AS business will continue to drive that number north. Our expectation coming out of the gate was not to be updating that number on a quarterly basis but we'll be thinking about adding that into the mix for '04 because it is an important metric, as far as how we think about our entire portfolio at TSG. Good question.

What's the thinking behind not updating on be it on a quarterly basis because if it's such an important number --

I'm -- what I'm saying, Simon, is that we will be considering updating on a quarterly basis in '04.

Okay. Great.

You bet. Well, with that, thank you. Thank you very much for joining us. Certainly Q2 included a healthy dose of the good and the not-so-good. The industry demand shocks we can't do much about that but those are short term anyway.

Fortunately when it comes to the longer term, there are no excuses. And during the past several months we've recorded several key milestones to create that -- that long-term picture. We're turbocharging an wide lead in the managed travel space with our release six product. Travelocity and total trip is a significant milestone in taking the shopping experience to the next level and facilitating our continued improvement in the merchant product volume and mix area.

The airline solutions continues to grow in the face of severe head winds and we positioned the Sabre Travel Network business for a postderegulation world by securing long-term contracts with many of the world's largest airlines therefore revitalizing the value proposition for the world's most extensive distribution network. And with that, thank you very much. Talk to you soon.

Ladies and gentlemen, that does conclude Sabre incorporated earnings conference 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.