Sabre Corp (SABR) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Sabre Holdings third-quarter 2003 earnings release. At this point, all of your phone lines are muted or in a listen-only mode. However, later in the conference, there will be opportunities for questions, and those instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded.

With that being said, here with our opening remarks is Vice President of Investor Relations, Ms. Karen Fugate. Please go ahead, ma'am.

Hello. Thank you for joining us today. I am here with Bill Hannigan, our Chairman and CEO; Jeff Jackson, our Chief Financial Officer; Sam Gilliland, President and CEO of Travelocity; and Eric Speck, our Sabre Holdings Chief Marketing Officer. Bill will review the highlights for the quarter, Jeff will review our results in more detail, and Sam will provide an update on Travelocity.

Before we get started, I would like to remind all of you that some of our comments on matters such as our forecasted revenues, bookings, operating earnings and cash flow, potential contracts or business and trend information are 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 factors section of the Company's most recent Form 10-Q filing with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliation of our special items and non-GAAP financial measures in our earnings press release and on our Website at SabreHoldings.com/investors.

Now, I'll turn the call over to Bill.

Thank you, Karen, and good morning. For the quarter, we met our earnings target for Sabre Holdings levels (ph). It was good to see a demand rebound start in the back half of the second quarter and continue in Q3. For TSG, this was another quarter of putting key elements of our reinvention strategy in place for our two largest businesses. We made significant strides in reinventing and reinvigorating the GDS business in anticipation of deregulation, and we made meaningful progress in reinventing our Travelocity company from a distributor of travel to a retailer of travel. That reinvention process included many wins and, as with any significant redesign, it also included some bumps in the road. We will be specific about both categories. Overall, the initiatives and milestones achieved improved our visibility for 2004, and establish a platform for enhanced profitability for TSG. In a few minutes, our CFO, Jeff Jackson, will (technical difficulty) numbers and will preview the high level revenue and earnings guidance for 2004.

Before I get into the specific initiatives across TSG in each of our companies, I want to comment on capital planning. We established a quarterly dividend program earlier this year, and declared the quarterly dividend earlier this week. In addition to this method of providing returns to our shareholders, we believe the stock repurchase program also fits at this time. We announced a $100 million stock repurchase authorization this morning. With a cash balance at the end of Q3 of over (technical difficulty) dollars and an expectation of continued healthy free cash flow generation, we would expect to continue our dividend program, evaluating inside (ph) each year relative to the S&P 500 average yield, and we would expect to revisit our appetite for continued stock repurchase after completing this $100 million authorization. And we will continue to be active in the M&A arena. Dividends, stock repurchases and reasonably-priced acquisitions fit hand in glove with our focus on profitability and shareholder return in 2004 and beyond.

While the year-over-year earnings growth rates for 2004 versus 2003 will be impressive, we take little satisfaction from that, with all that has gone on in the industry during the past year. 2004 is about absolute profitability. Revenue growth is still important to us, but to grossly oversimplify, if 2003 was about battling regulators and putting building blocks in place and changing business models, then 2004 is about executing and posting the profit numbers in each of the TSG companies.

Before I hand the baton to Jeff, I'll comment on some of the key issues and milestones of Q3 that are supportive of the points I just made. It was a strategic quarter for TSG in our companies. The word reinvention may be a bit strong, but it's close. Let me start with our Sable Travel Network company. Four headliners this quarter that paint the picture for this business for some time to come. We signed long-term contracts with key suppliers, including the four U.S. majors we hadn't previously signed. We launched the Jurni Network, announced just yesterday. We are integrating the sales and marketing of the GetThere corporate booking tool, or CBT business, into the Sabre Travel Network. And we announced steps taken to make meaningful progress toward a low-cost provider position in the face of a changed pricing environment, in order to preserve operating margins in the mid-teens.

At Travelocity, we moved aggressively to take advantage of increased flexibility under our affiliation agreement with hotels.com., and subsequently came to an agreement to terminate that arrangement. We are consolidating the technology assets of our GetThere company in the Travelocity business, as well as establishing Travelocity business as our single agency of record for the corporate market.

Yesterday, we announced acquisition of World Choice Travel. WCT distributes hotel rooms and other travel-related products to its own Website and a network of 1,700 Web-based affiliates. We expect this accretive transaction to expand Travelocity's hotel distribution by approximately 20 percent out of the gate.

Let me add a little more color on some of these initiatives. Back to Sabre Travel Network. After signing the four remaining U.S. majors during Q3, we now have DCA three-year agreements in place with over 20 carriers who will enjoy discounts on bookings which represent approximately 40 percent of our direct bookings. These long-term arrangements with key suppliers ensure content and quality for superiority. The deals have reinvigorated the value proposition for our supplier customers, and have recharged the agency channel powered by TN, both online and offline. We are no longer actively marketing DCA 3, but we do have negotiations in progress with a couple of the marketing affiliate airlines of U.S. majors in Europe.

We're also approaching the time of year when we will be making pricing decisions for those carriers who are not participating in the DCA 3 program. We typically announce pricing for the coming year in early December, with an effective date of February 1st.

A couple of other points on the DCA 3 program. When we launched the program, we talked about the trade-offs. We talked about the need to provide comprehensive content to our online and offline agency customers, in an environment in which DOT had failed miserably in protecting the rights of independent travel distributors. DOT went actually well beyond failing miserably; they proposed rules that unfairly attacked our business model and caused harm to our company and our shareholders. Standing pat was not an option. We talked about the desire to dampen channel shifts, and we talked about the need to change the game when it came to incentive growth, which is now our largest single expense line. Since signing all the major network carriers, we saw encouraging signs on the channel shift front during the back end of the quarter, but both months included events -- the blackout and Hurricane Isabel -- that would skew the numbers. The next few months should provide us with some more insight.

On the incentive front, it is our expectation that the market rate for incentives can improve, and that we can take steps in that direction. The old model of large and increasing incentive payments simply is not sustainable. We are working on a program which is based on our successful simplicity effort, a performance-based system that supports agency compensation needs for smaller agencies with a structured incentive plan. We are in the process of designing this offering for our U.S.-based medium-sized agency customers. We'll have more details later this year.

Speaking of performance-based models, earlier this week, we launched Jurni Network. A small acquisition, Nexion, will jump-start our creation of a consortium for leisure travel agencies. This will convert a part of the Sabre Agency Network into active marketers of higher-margin leisure travel offerings. The purchase includes 750 independent agents as charter members of Jurni. It will also enable the development of a unique integrated desktop application. This platform enables Jurni Network agents to merchandise preferred supplier offerings at the point-of-sale.

Let me say a couple of things about Europe and European market share, here, as well. Different from the other three regions in the world, where we enjoy leading market-share positions, in Europe, we're in the number-three position overall, with approximately 14 percent market share. The profitability of the GDS business has made it worthwhile to be aggressive with incentives in these few markets where we're number two or number three. In the post-DCA 3 world, the map has changed for all the GDS players. We'll be thinking hard about how aggressive we are with incentives versus a more product-led approach, whether it's more closely aligning our GDS and corporate booking tool capabilities to go to market, or by extending our successful German leisure platform into other European markets. That that being said, we will remain competitive.

The last component of redesigning the GDS industry's number-one player is on the cost front. We're taking steps to cut costs in many areas of TN and the organizations that support TN. With our scale advantage, it is encumbent upon us to be a low-cost provider. However, we will continue to invest, albeit in a very disciplined manner, in close adjacencies such as the Jurni Network.

As Karen said earlier, Sam -- it is part of our agenda this morning to talk about many of the facets of Travelocity (technical difficulty) integration effort. We looked across our portfolio and determined that by taking advantage of synergies and leveraging our industry-leading GetThere assets more aggressively, we could turbocharge our efforts in a couple of important areas. By the end of the year, we will combine much of the sales and marketing expertise of GetThere and our Sabre Travel Network business. Our goal is to accelerate the growth of our corporate booking tool through our agency and distributor relationships. In the meantime, we've had several record days for corporate transactions in just the past several weeks. And we're establishing Travelocity business as our only corporate travel agency of record, accelerating its ability to deliver comprehensive end-to-end travel solutions for companies of all sizes. At GetThere, we have always looked at the leadership map as follows -- number of customers, number of transactions and revenue per transaction. We are far and away number one in the first two categories. We see this next step as the best way to aggressively grow the dollars-per-transaction number.

A few words about our airline solutions business. While we are not dealing with changing models or wrongheaded regulators quite as often in this business, we are continuing to compete in a very tough environment for our airline customers and prospects to make purchasing decisions. In spite of that, our airline solutions company is getting it done. The industry's number-one player is landing new customers, whether they being flat (ph) carriers or low-cost carriers. We're growing revenue, we're growing market share and we're making money.

With that, let me introduce our Sabre Holdings CFO, Jeff Jackson.

Thanks, Bill. Total Company revenue for the third quarter, excluding a special item of 8 million, was 519 million, up slightly from the year-ago quarter. On a GAAP basis, revenue was 527 million. Earnings per share, excluding special items, were 24 cents, compared to 46 cents in the year-ago quarter, and earnings per share on a GAAP basis were 18 cents, compared to 40 cents in the year-ago quarter.

Now, I'll move onto revenue and operating metrics by business unit, starting with Sabre Travel Network business. Sabre Travel Network had revenue in the third quarter of 383 million, a decrease of 4 percent. The earlier-than-expected recovery in bookings we saw in June and the early part of July continued through the third quarter. However, our booking volumes still remain depressed year over year, and this, combined with a lower rate per booking we receive on DCA three-year option bookings, were the primary drivers of the revenue decline. Total global bookings processed in the quarter were 95 million, a decline of 3 percent. And direct bookings were 80 million, down 4 percent year over year. Breaking down total global bookings, U.S. bookings declined 6 percent, and international bookings ended the quarter up slightly, due primarily to a strong post-SARS recovery in the Asia/Pacific region, and numerous agency conversions in the Latin America region. Air bookings ended the quarter down 4 percent, while non-air bookings were up 5 percent, driven by strong hotel bookings from our online agency subscribers, principally Travelocity. Our worldwide bookings share, August year to date, is 35 percent. We expect to grow our share to 36 percent by year end, as a result of share gains in Latin America, as well as from meaningful market-share gains in the Asia/Pacific region.

Now, I'll move on to Travelocity. Travelocity's industry-leading membership rose by more than 1 million to over 41 million members during the third quarter. Gross travel sales exceeded 1 billion for the first time in a quarter, and grew 13 percent (technical difficulty) year. Travelocity had total revenue, excluding a special item of 98 million, growth of 18 percent. On a GAAP basis, revenue was 106 million. Total revenue, as a percent of gross travel booked for the quarter, was 9.4 percent, up slightly from the second quarter and up 5 percent on a year-over-year basis. Transaction revenue was $80 million, strong growth of 34 percent for the quarter. While we experienced strong transaction (technical difficulty) overall, it continued to be dampened by poor performance in site visits and bookings driven by our portal partners. In fact, for the quarter, AOL and Yahoo!'s combined site visits declined 3 percent year over year, versus growth of 41 percent for Travelocity.com. The strong transaction growth, particularly from Travelocity.com (technical difficulty) dampened by declines in advertising and other revenue. Advertising revenue was 10 million, a decrease of 24 percent, and (technical difficulty) driven by continued portal partner advertising shortfalls. Other revenue for the quarter was 8 million, down 23 percent year over year (technical difficulty) investments in Travelocity's international joint ventures, as well as the loss of hotel.com warrants.

Now, let me discuss transaction revenue a bit further. On the air side, transaction revenue grew 13 percent, while on the non-air side, transaction revenue, which is made up of hotel, car, cruise, vacation, last-minute and total trip grew 62 percent year over year and 33 percent sequentially. Taking our non-air transaction revenue one step further, our cruise, vacation, last-minute and total trip category grew 97 percent year over year and 33 percent sequentially, primarily due to growth in the last-minute deals and total trip packages. Total hotel revenue grew 49 percent, driven by a robust 106 percent increase in (technical difficulty) revenue. Our hotel merchant revenue, as a percent of total hotel revenue, was 62 percent, and our hotel revenue growth was driven by an almost 100 percent sequential increase in Travelocity's merchant hotel bookings and a 49 percent mix of merchant hotel volume. Total merchant revenue, as a percent of total transaction revenue, was 32 percent for the third quarter, up from 25 percent in the second quarter.

GetThere revenue for the quarter was $14 million, slightly higher year over year, and total transactions processed were almost 2.5 million, an increase of 26 percent from last year. On the corporate side, we saw revenue growth of 11 percent for the quarter; but, if you take the revenue from corporate trips, excluding a one-time payment from a distributor in the year-ago quarter, it grew 40 percent. Although trip volumes for United (ph) continued to grow, supplier revenue declined 24 percent year over year, as we expected, due to the (technical difficulty) customers.

Finally, third-quarter revenue for Sabre Airline Solutions was 56 million, an increase of 11 percent, compared to 50 million in the year-ago quarter. This revenue growth was due to solid performance our products and services group, through a mix of new business and organic growth, as well as from key reservations hosting customers such as Southwest Airlines.

Now, I'll turn my remarks to Sabre Holdings' expenses, operating income and margins for the third quarter, starting with expenses. Total company expenses grew 11 percent year over year on an adjusted basis, and increased 12 percent on a GAAP basis. The biggest drivers of this growth were customer incentives, advertising and promotion for Travelocity and data processing. Operating income, excluding special items, was 59 million, with an operating margin of 11 percent. Operating income on a GAAP basis was 44 million, resulting in an 8 percent operating margin. And by business unit, Sabre Travel Network had adjusted operating income of 66 million and 63 million on a GAAP basis, and a margin of approximately 17 percent on both a GAAP and an adjusted basis. Travelocity had an operating loss of 6 million on an adjusted basis, and 12 million on a GAAP basis. GetThere had an operating loss of 3 million on an adjusted basis and 10 million on a GAAP basis, and Sabre Airline Solutions had operating income of 1 million and a margin of 2 percent. Absent a product investment write-off of 2 million this quarter, Sabre Airline Solutions' margin would have been consistent with its margins in the second quarter.

Now, turning to other financial data for the quarter, our adjusted EBITDA was 87 million, and our GAAP net income was 25 million. Our free cash flow for the quarter was 55 million, and cash provided by operating activities was 66 million. Also, we ended the quarter with a cash and marketable securities balance of slightly more than 1 billion, a debt of 598 million and net cash of more than 400 million. Our debt includes the carrying value of the Company's public debt of 434 million, and 164 million capital lease obligations.

Now, I'll turn my remarks to the outlook for the fourth quarter and for the full year 2003. For the fourth quarter, we expect revenue to be up 2 percent to 5 percent (technical difficulty). We expect EPS, excluding special items, to be approximately 0 cents. This estimate includes an approximate $20 million pretax -- approximately $20 million pretax of severance that in the past would have been considered an adjusting special item. We expect earnings per share on a GAAP basis to be -15 cents. This estimate includes approximately $20 million of facility and real estate charges, in addition to the $20 million of severance I just mentioned. For the full year, we expect revenue on an adjusted basis will be down 3 percent to down 2 percent, and on a GAAP basis to be approximately flat. We expect earnings per share, excluding special items, to be approximately 82 cents, and EPS on a GAAP basis to be approximately 52 cents. Full-year adjusted EBITDA will be approximately 290 million, and GAAP net income will be approximately 75 million. Free cash flow will be approximately 175 million, and cash flow from operations will be approximately 225 million. Our free cash flow and adjusted EBITDA estimates reflect the impact of the $40 million charges I mentioned previously.

Our third-quarter capital expenditures were less than our plan. Therefore, we now expect to end the year with capital expenditures of approximately 70 million. Finally, we expect to finish the year with a cash balance of approximately 950 million after paying three quarterly dividends and closing the WCT acquisition.

Now, I'd like to give you an initial look at our expectations for 2004. For a variety of reasons, the 2004 guidance will be on a high level. We are in the middle of our budgeting process. Our guidance will not include impact on the individual business units from the GetThere integration, or the impact on Travelocity from the WCT acquisition announced yesterday. We will provide you with further details on our 2004 assumptions on our January earnings call.

In 2004, we expect total company revenue growth, on an adjusted basis, will be approximately 8 percent, and revenue growth on a GAAP basis will be approximately 6 percent. Total company earnings per share, excluding special items, will be greater than $1.20, and EPS on a GAAP basis will be greater than $1. Looking at each business unit, Sabre Travel Network will have flat revenue growth year over year, excluding special items, and slightly negative on a GAAP basis. Travelocity revenue growth will be greater than 25 percent, excluding special items, and greater than 22 percent on a GAAP basis. Sabre Airline Solutions will grow revenue in the low-teens, and although it will be incorporated into the three business units in 2004, GetThere corporate and supplier revenue growth is expected to be greater than 35 percent.

Turning to margin by business unit -- and these business-unit margins do not yet reflect the financial impact of the GetThere integration -- we expect Sabre Travel Network margin to be in the mid-teens on an adjusted basis and low teens on a GAAP basis. We expect Travelocity margin to be in the low single digits on an adjusted basis and breakeven on a GAAP basis. We expect Sabre Airline Solutions margin to be in the high single digits

Now, I will address our cost-cutting efforts for 2004. Overall, we expect our cost-cutting and restructuring initiatives to generate savings of approximately $80 million next year. Major areas of reduction include product expense reductions of approximately 40 million. A large portion of these cuts are being made in internal systems and in the GDS product line. We continue to increase our investments in our high-growth online activities and our core pricing and shopping capabilities. SG&A expense reductions of approximately 25 million, principal focused on companywide overhead and the GetThere integration savings. And approximately $50 million of other miscellaneous expense savings. While we expect our total expenses will increase approximately 100 million in 2004, our expense growth would have been higher if not for these reductions. The cuts will grow a long way in offsetting some of the cost categories that continue to increase. For example, data processing expense will increase by more than $30 million, driven by the growth in online shopping and the multiyear transition to our new pricing and shopping platform. In 2004, DP expense will peak, due to the concurrent operation of the legacy platform with ATSE. We plan to complete the migration to the new platform in late 2004 or in 2005, and we anticipate a meaningful decline in DP expense in 2005, as open systems fully replace legacy shopping and pricing. The good news is that technology is working very well, and exceeding the promise of greater capability at significantly lower cost. 2005 will be the year for the P&L payback, but in the meantime, we're observing a greater than 80 percent decrease in the expense of processing like-for-like transactions. A second example is incentives. Including the incentive paid by Sabre Travel Network to Travelocity, we expect incentives to increase by more than $50 million next year, from a base of approximately 400 million in 2003, and we will also see increases in a variety of other cost categories, such as advertising and promotions, selling and benefits and other miscellaneous items throughout the business unit. As we continue to work our way to a low-cost position in the Sabre Travel Network business, we expect other re-engineering effort to drive additional cost savings throughout 2004.

For 2004, we will continue to have strong cash flow metrics, and to use that cash flow in a variety of ways to create value for shareholders. It is the Company's intent to continue paying a quarterly dividend and, as we announced today, we now have a 100 million share repurchase authorization, and we intend to opportunisticly repurchase our stock. Taking that all into account, we expect to start the year with a cash balance of approximately 950 million, and end the year with a cash balance of more than 1 billion.

Now, I'd like to turn it over to Sam.

Thanks, Jeff, and good morning, everyone. As Jeff covered most of the numbers, I'll cover only a few. And in doing so, I'll focus upon the reinvention of the business that Bill talked about earlier.

So, first, let me spin back 12 months. A year ago, we didn't have a merchant hotel business. We were simply a distributor of products at price points set by someone else. Today, we control our own destiny. We have total flexibility in how we merchandise our hotel products. So we have a wholly new model surrounding our hotel business, and as of yesterday (technical difficulty) hotels at are fully operationalized for sale on Travelocity.com, Yahoo! and AOL. Not only have we reinvented the hotel business at Travelocity, our innovation leads the industry, with compelling game-changing business model, business process and technology offerings. Later this year, we will provide further complement to the strength of our supplier value proposition, with the addition of consumer demand, driven by the more than 1,700 affiliates of World Choice Travel, the hotel distribution asset we agreed yesterday to purchase from MyTravel. And we have seen dramatic growth as a result of our efforts -- 49 percent year-over-year growth in hotel revenue, as Jeff mentioned, and 28 percent sequential revenue growth. Merchant hotel bookings, as a percentage of total hotel bookings, reached 49 percent in the quarter, despite a loss of content from one provider on September 2nd.

To comment a bit further on our progress since September 2nd, when, as most of you know, hotels.com contact was no longer available on our site -- at the time, total merchant hotel bookings, our own merchant hotel bookings plus those of hotels.com, were running at about the 49 percent level I mentioned a moment ago, and our own merchant hotel sales were about half that mix, in the mid-20's. On September 2nd, we did see a dip in total merchant hotel sales to approximately 36 percent of total hotel bookings. But, as you do the quick math, you'll note this represents a more than 40 percent jump in sales of our own merchant product, from the mid-20's to the mid-30's percent of total hotel sales. And that change fueled the nearly 100 percent sequential growth in our own merchant bookings over the last quarter. Nevertheless, it's obviously very important that we quickly return to the pre-September merchant hotel sales levels. And I am pleased to report that the team is quickly filling the content gaps, bringing our month-to-date October mix north of 40 percent.

Moving on to packaging, we launched TotalTrip, with new leapfrog technology, in the final days of June this year. And thanks to our increased cross-selling efforts across the site, the continued acceleration of our last-minute deals offering and the introduction of TotalTrip, Travelocity sold over 300 percent more packages in the first nine months of 2003, compared to the same period in '02. Less than three months after launch, TotalTrip hit its first million-dollar day in sales, and TotalTrip volumes continue to grow each month. Soon, you'll see its presence expand around the Website in cross-sell offers. We'll also begin offering add-ons in TotalTrip, such as insurance, rental cars, ski lift tickets, theme parks, ground transfers and more. Our margin on this product is more than three times that of a component hotel booking, reflective of a higher average length of stay, higher average customers per booking, and a higher mix of merchant content. In fact, nearly every unit metric surrounding TotalTrip is either meeting or expectations thus far. The success of TotalTrip stems in part from intensive consumer research and user interface innovations that make it easier than ever before for consumers to build the trip they want. Compared to our legacy Travelocity vacations products, based on outsourced technology, the new TotalTrip has achieved a 460 percent improvement in conversion rates or look-to-book ratio among package shoppers. In addition to being four times more likely to purchase, consumers are finding it easier to complete their purchase without calling us. Before, nearly 60 percent of package purchases were completed on the phone with our call centers. With total trip, calls center sales make up around 20 percent, because it easier to use, which means big savings in our variable cost per booking.

A few areas that require little reinvention are our cruise and last-minute deals businesses, as they seemingly set new standards in the marketplace on a continuous basis. The cruise business grew its volume 61 percent year over year on the strength of our product innovation, now including our best-in-class total cruise offering, introduced in July, to provide flexible flight and cruise shopping. And our last-minute deal volumes grew nearly 140 percent year over year, based upon the many improvements to the site over the past year, including increased origins and destinations. About half our growth came from increased traffic, with the remainder coming from improved conversion, both components speaking to the attractiveness of the last-minute offering.

That leads me to the corporate market. We launched Travelocity Business on August 11th. The offering is based on the best of the Sabre Holdings portfolio -- GetThere for the corporate online booking tool interface, with specially trained Travelocity agents providing service using Travelocity's automated fulfillment technology. Over 100 customers of various sizes have signed up to use Travelocity Business, and are in various stages of implementation and adoption. Our value proposition is receiving very positive marketplace response, with a combination of significant cost savings opportunity -- on average, $142 a trip -- backed up by our unprecedented 60-second service guarantee. We have added new capabilities since launch, including executive services, with many other enhancements in development.

As Bill touched on earlier, Sabre Holdings recently announced that it would be integrating GetThere into other business units, to increase our leverage of those assets across the portfolio. As part of that, the Travelocity team is excited to take on the responsibility for product marketing, development and technical customer support for the GetThere online booking tool technology for each of its customer segments. By bringing the GetThere and Travelocity development teams together, we will be better able to reuse code in both platforms, significantly reducing development and operational costs. Equally important, Travelocity Business will benefit from the market knowledge, skill and expertise of the GetThere team. Travelocity Business will also be assuming responsibility for GetThere's corporate agency fulfillment offering, branded GetThere FSO. FSO, by the way, stands for full-service option. Therefore, we will have our corporate fulfillment offering managed in one place, allowing us to draw synergies in the form of increased knowledge, capabilities and cost savings.

So we have a great opportunity to leverage the vast resources and experience as we redefine and reinvent the value points in business travel, based on the strong foundation laid by GetThere. And, clearly, more invention is required, and we have a few bumps in the road ahead. One important example is our portal relationship. As Jeff indicated earlier, while Travelocity.com traffic grew 41 percent year over year in the quarter, traffic from our portal partners declined 3 percent. While we are obviously not satisfied with the production or the lack of profitability from our portal relationships, it's encumbent upon us to work with our partners to evolve those relationships to be better reflective of their changing strategies and ours.

Finally, a note on advertising. We have received a number of questions over the past several quarters about our advertising and advertising spend. Consistent with past calls, I will not be talking about our specific spending, except to say that it will continue to grow this year and next. What I will tell you is that we will be spending it with a different firm. Earlier this week, we made the decision to move to a new creative agency, and will begin the transition immediately.

So lots of progress and strong revenue growth, and yet more work to do as we position ourselves for a profitable 2004.

And with that, I'll turn it back to Bill.

Thanks, Sam. Why don't we go ahead and start with the Q&A.

(OPERATOR INSTRUCTIONS). James Kissane, Bear Stearns.

Bill, in the press release, you alluded to a post-regulatory world environment. Can you give us some insight when you expect to be in a deregulated environment, and how Sabre's going to operate and how shareholders will benefit from that?

Absolutely. We hope that the rules will be allowed to expire at the end of January. At the same time, the steps that we have taken in 2003 really mitigate regulation, anyway, and to a great extent, I believe, has created the market that will work with or without the DOT. And then, obviously, that has come at a price, and we talked about that pretty explicitly. We believe that we have established a foundation for our GDS business to be able to create a more predictable free cash flow revenue-generating characteristics that we've had in the past. We've marketed the DCA 3, probably to the extent that we're going to market that, as I said earlier. About 40 percent of our direct bookings are covered now. I think, with the affiliates of some of the U.S. majors, that that the number could get slightly north of 40 percent. And it's time to look at our pricing for 2004, as well. So suffice it to say, Jim, I think that we have mitigated a lot of what the DOT can and can't do through the efforts that we've undertaken in the marketplace. And also, Jurni Network is an example of where we're going. With the Jurni Network, we are creating a platform for leisure agencies to sell preferred supplier content at the point-of-sale, and then is also a dose of, for example, of a deregulated world.

And just a quick question for Sam. You've obviously been extremely successful adding hotel properties, but can you give us a sense of the economics, maybe relative to the economics that your competitors have been achieving, and your investors got used to, and maybe expecting from you?

Well, I think the economics of the deals that we struck with the hotel chains or the independents are very competitive with anyone else in the marketplace.

Chris Gutek, Morgan Stanley.

I wanted to follow up on the pricing environment. It sounds as if essentially all of the major U.S. airlines have signed up for DCA 3-year, and there might be some smaller airlines yet to sign up, but just to be clear on the comments, it sounds as if you are offering some price discounts to some of the European airlines -- in particular, some of the partners of the major U.S. airlines. Can you elaborate a bit more on how many big European airlines you may offer price discounts to? And specifically, would those price discounts be the same as they're being offered to the DCA 3-year program, or some other type of discount?

Discounts will be in the ballpark. There were a couple airlines, and when you're doing the math, we are right at about 40 percent of our direct bookings now under discount, at approximately 12.5 percent. I would just extrapolate that out to being a number in the low 40 percent range of bookings, discounted about 12.5 percent; it gets you pretty close.

And the remaining airlines that won't be under those discounted programs -- would you expect those constituents to pay an increased price, or do you have some type of other program you might expect to roll out that would offer a more minor or modest price discount to the rest of the airlines?

The DCA 3 offer was in the marketplace for quite some time. My expectation is that we'll be talking about 2004 pricing in the next probably six weeks.

Tom Underwood, Legg Mason.

I had a couple of questions. One, I was just wondering if you could give us an idea of what you expect for free cash flow in '04, and specifically what you're seeing for CapEx and D&A?

On the free cash flow side, you would expect to see pre-stock repurchase and an additional approximately 200 million hitting the balance sheet in 2004.

I would say we expect our year-end cash balance to be up by 200 million prior to those two items.

And then, Sam, you mentioned the lack of profitability of the portal deals. Are both portal deals (technical difficulty) that also of what you are forecasting when you're talking about the single-digit margins on an adjusted basis for Travelocity next year?

I won't speak to the individual economics of AOL and Yahoo!; I will just say that overall, they lack the profitability. And we are in the process -- we are engaged in very productive discussions with both AOL and Yahoo! to improve the economics of those deals. And so we expect them to improve, but on the other hand, we have not built in significant improvement in the '04 plan.

David Richter, Smith Barney.

Just a follow-up to Tom's question. What do you think is driving the volume through the portals? What can you do to address it? And can you just remind me how much the portals account for total volume? I think it's around maybe a third.

The portal revenue is just over 20 percent for Travelocity.

And, I'm sorry -- the other part of your question?

What do you think is driving that weakness? Do you think maybe customers are increasingly going direct to the proprietary sites? Or I guess, what can you do to try to boost (ph) portal volumes?

I think some of it is going direct. I think it's also -- there have been some changing strategies with portals, meaning there has been a larger focus on online search and online search capability. So you've seen that in the Google relationship with AOL, and in the moves that the folks at Yahoo! have made. So they are increasingly focused on search. We certainly have a lot of our visitors coming to us from AOL and Yahoo! directly through search. So it's -- I imagine, in many respects, it's just a change in the way their business have evolved over the last year or so.

As kind of the exclusive provider of travel to these guys, when I do a search on one of their sites, are you going to get preference, or do you get preference on kind of where Travelocity shows up in the list?

Well, our relationship with Yahoo! is an example. In search results allows us better positioning, and the same thing applies as you look at AOL. We are their travel provider, and we participate and we purchase advertising through Google and Overture. So we naturally show up in the search results on both of the portals.

Brian Egger, Harris Nesbitt.

I just had two questions. The first is with respect to (technical difficulty) I'm not sure if you can share with us any parameters or assumptions, in terms of the level of gross travel sales or the portal partner performance you would need to achieve operating profitability next year, and maybe any thoughts on which quarter or when in the year you might expect to turn profitable on an operating basis. And my other question is just in terms of your share repurchase authorization -- any thoughts regarding a timeframe over which might be active in executing that?

A couple of comments. I'll start from the back at work my way forward. We will continue to be fairly conservative with our balance sheet. Having said that, I don't know expect that 100 million to languish on the balance sheet. Secondly, in talking to the Travelocity numbers, I expect that we'll get more explicit about the breakout by quarter on our fourth-quarter call, in January. We talked about growth rates at Travelocity of greater than 25 percent and, as you would expect, our internal plans for all of our businesses are more aggressive than the numbers that we've talked about on this call. And we certainly will have plans in place to ensure profitability at various growth rates.

Right. And I guess I assume your current guidance takes into account some of the challenges with respect to the portal partners that were articulated in the third quarter?

Absolutely.

Scott Barry, Credit Suisse First Boston.

Two questions. Could you talk about your expectations, at a high level, for channel shift for 2004 that are incorporated into that guidance? And secondly, higher level, have you encountered any pushback or any issue from your Sabre Travel Network customers from the activity you're taking that's more retail-oriented, including GetThere FSO, et cetera, the potential channel conflict -- have you gotten any pushback from your core customers?

Good questions. I'll start from the back on that one, as will. With GetThere, part of what we have done with GetThere, by taking the FSO offerings offered by our GetThere team, who also offer the CBT in the corporate space, and taking that FSO offering and putting it in Travelocity Business, we created the Chinese wall for our customers. So if you are a travel agency working with our GDS company and our CBT company going forward, we're providing you with technology -- distribution technology assets to sell hand-in-hand with our agency customers, at the same time recognizing that within the TSG portfolio, Travelocity and Travelocity Business will be a competitor in that space. So frankly, I think that we have reduced channel conflict within our portfolio by creating a single travel agency of record in the corporate space within TSG.

I'm sorry; I lost you on the second question. (multiple speakers).

Just your expectations for channel shift. Have they changed for '04?

Right. Our expectation for channel shift is in the ballpark of what it has been the last three years. So the 4 to 5 percent range, so one reaction could be, is there some potential upside in that number, based on DCA 3 being in the marketplace, and access to all content for our agency customers? And we would say yes, there is some opportunity there. We'll know more, I believe, over the next few months, as far as the impact of DCA 3 and channel shift.

Just one follow-up, if I may. This MSO, or this consortium that you formed -- what's the value proposition to the retailer versus VCOM (ph) or GIANTS, et cetera?

(indiscernible) question. I'm going to kick it to Eric Speck, our Chief Marketing Officer, to talk about that.

Yesterday was a big milestone day for reinvention at Sabre Travel Network, with the announcement and creation of Jurni Network, which is a technology-driven consortium. For those of you who are not familiar with how the consortia work in the marketplace, there's about 30 consortia in North America -- GIANTS, vacations.com, which is done by Amadeus, and Results, which is owned by Carlson, are the three leaders. Our value proposition here is really twofold -- one to suppliers, for creating a preferred sales network, and to the travel agencies who join the membership, which gets the benefit of consolidated purchasing power, access to preferred supplier agreements in exchange for an agreement to aggressively sell and market those preferred suppliers. So it's part of a dual-value proposition, and our distinction versus the other consortia in the marketplace is that ours is a very powerful technology-driven marketing intelligence tool that will help better direct and sell the travel products.

Paul Keung, CIBC World Markets.

I have three questions. The first is, now that you've have had a few months of DCA 3, where are some of your early gains, as it relates to Travelocity in terms of, given that we're probably seeing less of the Web fare environment in the airline-only fares? And also, as it relates to your ongoing discussion and negotiations with your travel agency partners? The second question is just going to Europe and Germany. How is the Germany and (indiscernible) doing, and what can we expect you to do from the standpoint of spending (technical difficulty) acquisitions next year? And the last one -- I'll ask the last question later.

Paul, on the channel shift front, we talked earlier about the fact that we have built into our plan about a 4 to 5 percent shift, and we will see. I also talked at the front end of the call that we saw some positive evidence in the first few months after we had all six of the majors under contract, but those numbers were skewed by the blackout and Hurricane Isabel. If there's a question as to why that would be, it's because the brick-and-mortar agency channel is less likely to actually cancel when they rebook, so it actually changes the denominator.

From an auto perspective in partnerships in Europe, we will continue to invest in '04 in Europe with our auto partner through Travelocity EU, and I expect that on the January call, we will be a little bit more specific, but not too specific about what the expected loss is that is built into our current plan, as we grow in key markets.

On your incentive fee (ph) front, then, you mentioned 50 million over the 400 million base. Is that 13 or that low teens increase -- is that really a function of the residual of the increasing contracts, or would you expect, as you renegotiate new contracts on an annual basis?

That's a great question. We do have about 30 to 40 percent of our contracts coming to rebid or expiration in 2004, so that's part of the mix as you recalibrate to market, when you think about a contract signed three years ago versus a contract signed now. So there is a foot (ph) push-pull going on here. As the number comes up to market and as we large initiatives to bring the market rate down, we have loaded in a number that actually looks like a growth number, similar to '03 over '02. And certainly, there is some opportunity in that number, as well, depending on how successful our initiative is, especially in the midmarket. But we'll know more as we work our way through it.

And then on the portal agreement --

Also, one last point. We're definitely seeing more so-called Web fares. The definition of Web fare has continued to change over the last several years, but the airlines are getting more and more aggressive about differentiating between low-cost and high-cost GDSs -- for instance, based on regional pricing that all the GDSs have, a booking with Amadeus is $1.20 more, which is a pretty significant number for the airlines. And I expect that that is all part of the next wave of what will happen in the marketplace post-DCA 3.

So it sounds like you just price those around different fare codes, I guess.

(indiscernible).

The next question on the portal agreements -- you mentioned traffic is off 3 percent. Can we assume that Travelocity has gross bookings that actually grew in the high teens, and that the portals actually contributed less in your gross bookings for the quarter?

We talked about site business, and then we talked about transaction revenue. The site business were up at .com by over 40 percent, and the site business at the portals combined were down three.

And we're not talking -- we're not going to talk to transaction volumes.

Is it safe to assume that the gross bookings grew faster at your own site? Significantly faster?

Yes, yes.

Absolutely.

Gregory Gould, Goldman Sachs.

Sam, first on Travelocity. Do you expect any major changes in the advertising message with the new agency? Or do you plan on any changes, I should say?

Actually, we do plan to make some changes in the message. But at this point, we're not talking about what those changes will be.

Jeff, on market share, you mentioned that the share should increase about a percentage point by the end of the year. Do you have any thoughts on calendar 2004? You would get that percentage point increase at the end of this year. Any thoughts on increases next year, further increases?

We are baking that into our plans as we're building our plans, of course. I would simply say -- first, to answer your first question, that is what we anticipated to happen throughout the year, as we added share and we anniversaried loss of some contracts. In 2004, I would only say -- and this is to sort of expand on Bill's remarks. There would be less of a focus on share per se, and more of a focus on profitability, and that's why we wanted to talk a little bit about some of the cost items and our efforts to dampen the growth of some of those key cost items.

So built into our plan is flat market share. I talked earlier about where the airlines go next in differentiating between lower-cost and higher-cost distribution channels. And if our competitors don't step up on that front, I would expect the opportunity for share growth. But Jeff's point is more on point, which is profitability.

Michael Millman (ph), Millman Research.

Following upon the incentive question, I think you said 30 to 40 percent represent rollover. I'm not sure if you said how much of that 50 million was represented by that. Also, could you let us know, included in your forecast of both incentives and growth, what are you assuming about bookings? And then, to what extent do the increased incentives represent increases or changes between how you might price between small, large, medium agencies and new agencies, for example, getting more business from Rosenbluth -- what that does to that 50 million?

The 50 million number is reconciled back to our assumption of share, our assumption of market growth. We've gotten specific on some of those things and haven't gotten specific on others. Certainly, pricing from a small agency to a mega agency is very different, from an incentive perspective, and at the high end of the market, with what we call our globals, we actually do the math on a per-account basis in creating our plans for the following year, which would include opportunities like a Rosenbluth. And certainly, as you go down market, it's more of a segment analysis that goes to the success of our simplicity program for small agencies, and also goes to our initiatives in the midmarket. And we don't have a lot loaded into the '04 plan, as far as changing the game in the midmarket out of the gate with the percentage of contracts that we have coming up for rebid. But an important initiative, nonetheless, to change the game over time.

Could you just give us some idea of what you're looking for in improvement bookings generally? On GDS?

We will probably talk about that more specifically on the January call.

Randy Heck (ph), Goodnow Grey (ph).

Can you give us what the merchant hotel room volume was for the quarter? That's my first question.

Well, we mentioned before that we were at about 49 percent merchant overall, and if you -- I think we really haven't been talking about are room night volume thus far, and I think we'll continue that approach.

What we will say is WCT added about 20 percent out of the gate.

I'm sorry? Say that again?

The WCT acquisition will add about 20 percent out of the gate to our room night volumes.

But is there anywhere where we could see the actual volumes on any of these -- I mean, on the merchant business?

We have not communicated that.

Okay. Second question is, on the three-year -- the GDS business. You said that the 12.5 percent discount deal, three-year deal, should impact about 40 percent of volume for the GDS business. What are the assumptions next year for the rate on the other 60 percent?

We will be talking about pricing in early December, when we do our pricing actions for '04, with the expectation that those pricing actions would affect between 55 and 60 percent of our base.

And then, lastly, your comments about the cost increases next year. The incentive increase of 50 million -- did I hear you correctly that that's before you take actions to renegotiate those changes? And that increase -- is that only the agents? Or are the portals in that number? The deals you have with AOL, Yahoo!, et cetera?

The numbers are all about agencies.

And that's a 50 million increase without changes?

For the most part, that's correct, as we sit here in October.

Jerry Galant, Huberman Financial.

Would you please comment on the competitive response so far to DCA 3, which seems to (technical difficulty) the other three GDSs? And what is the potential impact in the marketplace there for market share and incentives?

I think that certainly Gallileo, owned by Cendant, has been heading down the same path we have for some time now, and they have signed up several carriers. And we're seeing some like activity by Worldspan. To this point, Amadeus has resisted. Certainly, there's risk in that, with half of North America running 8 to 9 percent, becoming clearly a higher-cost distribution channel relative to the competition, not to mention the fact that their travel agents customers are at a significant disadvantage for content. And I expect that disadvantage will continue to grow. Clearly, Amadeus -- I shouldn't say clearly. I would suspect that Amadeus worries about what pricing actions here will do relative to their marketplace in Europe. But I don't need to speak for Amadeus; they certainly are a strong competitor, and they can speak for themselves. I expect that the kind of activities from Cendant and Worldspan are in concert. I expect that over time, if the other GDS or GDSs don't step up, again, they will lose share in the marketplace.

Mary Johnson, Goldman Sachs.

My question was actually related to that -- Amadeus is going to announce their pricing plan in December, as well. Do you have any idea what you think that they'll introduce? And then I had a second question regarding the regulatory process.

I don't know what Amadeus is going to introduce as far as pricing in '04, no.

Mary Johnson okay. And regarding the European airlines, you mentioned that you were discussing with some of the partners of U.S. airlines you've signed up with. Could you comment on whether -- what level of interest you're seeing from them?

Well, enough interest that we are certainly in negotiations with a couple of the carriers. It's a different environment in Europe, so far. However, I think that we will see Europe align with the North American market more over the next couple of years.

Mary Johnson And finally, just on the regulatory process, I noted that you objected to the DOT's redefining what constitutes a GDS and who they can regulate, expanding the scope to non-airlines GDSs. Would you ever consider doing a legal challenge, if they decided to change the scope of the rules to include you?

Absolutely.

I think we are out of time, so we're going to go ahead and end the Q&A.

Indeed. With that, I'll turn it back to you.

Okay. Thanks, everybody.

Thanks a lot. See you soon.

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