Sabre Corp (SABR) 2003 Q4 法說會逐字稿

Good morning, good afternoon or good evening, and welcome to the Sabre Holdings fourth-quarter and full-year 2003 earnings conference call. Now, at this point, all of your phone lines are muted or in a listen-only mode. However, later, during the earnings release, there will be opportunities for questions, and those instructions will be given at that time. (OPERATOR INSTRUCTIONS). And as a reminder, today's call is being recorded for replay purposes.

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

Thanks, Brad. Hello, everyone. Thank you for joining us today. I'm here with Sam Gilliland, our CEO; Jeff Jackson, our Chief Financial Officer; and Michelle Peluso, President and CEO of Travelocity. Sam will review highlights for the quarter and full year, and Jeff will review our results in more detail, and Michelle 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 our forecasted revenues, bookings, operating margins and cash flow, potential contractor business and trend information may 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 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 reconciliations of our items and non-GAAP financial measures in our press release and on our Website at www.Sabre-Holding.com/investor.

I'll turn the call over to Sam.

Thank you, Karen, and good morning, everyone. It's been just over a month since I assumed the role as President and CEO of Sabre Holdings, and during that time, I've had the opportunity to personally meet many of you. And in the coming months, I look forward to spending time with many more of you.

On our last call in October, we talked a great deal about reinvention of our businesses, the steps taken in anticipation of deregulation of the GDS business, and our progress in migrating Travelocity from a travel distributor to a travel retailer. In short, 2003 was a building year for Sabre Holdings, and 2004 is clearly all about execution. We've put the building blocks in place to drive more predictable revenue and expand earnings in '04. I'll talk more about our plans in a few minutes, and later in the call, Jeff Jackson will report on our Q4 numbers and provide our outlook for 2004.

But before I get too far down the path on 2004, I'd like to briefly cover 2003 and some recent initiatives. For our Sabre Travel Network business, the year ended on exactly the right note. As you know, the DOT announced on December 31st that it would not adopt the proposed rules issued in November 2002, and instead cleared the way for total deregulation. This decision is a huge win for the CRS industry, travel agents and consumers. The NPRM, proposed by the DOT, would have been very harmful for all parties. I'm proud to say that Sabre Holdings took leadership in the marketplace to push for total deregulation, and our efforts paid off.

What does total deregulation means for Sabre? Well, we've been preparing for this for over 14 months. A good example is the DCA three-year agreements we struck with 24 carriers, including the top six U.S. airlines, and earlier this month with British Airways. These airlines committed to the highest level of participation for three years. Going forward, we know that deregulation will bring challenges, but it also affords us a much greater ability to find creative ways to market and promote airline services, enhancing our value proposition for airlines and supporting our transition to travel retailing. In short, removing the regulatory constraints means we have full flexibility to run our business in the way we believe is best for our shareholders and customers.

Now, a bit more about our DCA 3 program. As mentioned on the third-quarter call, we do have negotiations in progress with a few of the international flag carriers. We anticipate that by year end, approximately 50 percent of our global direct bookings will fall under the DCA three-year program. With the exception of these few carriers, we have a stop sell on the program in the marketplace. But again, to set expectations appropriately, stop sell means just that -- no more continued marketing of the program for the time being. It also means that negotiations now underway with airlines may come to fruition in the next several months. Also, earlier this month, we notified our non-DCA 3 airline customers of an average fee increase of 4 percent, effective February 1st. This calculates to an effective average increase of 2.3 percent across all of our bookings.

Taking a look at channel shift, you'll recall that channel shift reflects a shift of GDS bookings to supplier-direct bookings channels. And as we mentioned on the last call, we have seen some encouraging indicators. And with a few more data points, it looks like we have the start of an encouraging trend. Over the last couple of years, we've been saying that channel shift has been running out about 5 points. However, in the last two quarters of this year, we've seen it in the 3 to 4 point range.

Before we move on to other businesses, let me briefly touch on agency incentives. With airline booking fees coming down, there will inevitably be downward pressure on incentives across the industry. This is simply a consequence of the substantial investment Sabre has made to level the playing field for our travel agency partners, ensuring access to Web fares and published low fares for DCA 3 carriers. Later in this quarter, we will introduce a new structured travel agency incentive schedule for small to medium agencies in North America. It will be similar to the Simplicity structured incentive program that's been very successful over the past few years with our smallest agency customers. Keep in mind that these actions serve to slow the rate of growth of agency incentives.

Moving to Travelocity, we made good progress in our shift to travel retailing. The Travelocity merchant hotel program was established with more than 9,000 hotels by year end, and we rolled out new functionality such as TotalTrip, our dynamic packaging engine that allows consumers to book air and hotels together. We closed the World Choice Travel deal on November 20th, and we are very excited about the distribution breadth that WCT brings. Recently, we completed the rollout of the new hotel pass, and we've made significant progress in our discussions with our portal partners to improve our relationships and performance in 2004. Michelle Peluso will go into more detail on this and other Travelocity results later in the call.

I do want to say, before we move on to the other businesses, that Travelocity accomplished a great deal in 2003. But clearly, we're not happy with the financial results. We didn't achieve what we set out to do in terms of profitability. But we did prepare ourselves well for the coming year, and we're committed to executing on our plan.

Turning to other business activity in 2003, in the fourth quarter, we launched Jurni network, our consortium for leisure travel agencies. Supplier and agency interest is strong. We have over 750 agents in the network today, and this quarter, we will announce our initial preferred suppliers.

Looking at Airline Solutions, the business continued to sign deals in the Asian market, most recently signing agreements with Thai, China Eastern and Phuket. Deals signed in the fourth quarter resulted in the strongest quarter of the year, in terms of total contract value. Also late in the year, we completed the GetThere integration. Jeff will cover what that means to our business unit financials in a moment.

And finally, in 2003, we put in place quarterly dividends. In fact, we just announced this week an increase to the dividend of 0.5 cents per share, or approximately 7 percent. In the fourth quarter, we authorized a stock buyback of $100 million.

In summary, for 2003, I would say that each of our businesses took actions to address distinctly market environment and competitive pressures. We dramatically improved merchant offerings, created more value for travel suppliers and our travel agency customers, and maintained leadership in our airline optimization business in a particularly tough environment.

Moving to 2004, Jeff will cover the detailed financials and assumptions, but I'd like to talk briefly about strategic focus for the year. When I look at what we need to do this year, there are really four core strategies -- to excel at travel retailing, to unleash the full potential of the GDS, to reduce costs to enhance our competitive advantage, and to maximize the performance of each individual business.

In terms of excelling at travel retailing, that means leveraging the strong foundation Travelocity built last year, with its leading packaging and hotel technology, by further enhancing our product creation and customer service. It also includes a strong push in our marketing and branding campaign to reach our targeted consumers and increase traffic to our site. We are also working to expand our capabilities in the corporate space to address the entire spectrum of business travel. It's also critical to unleash the full potential of the GDS. With deregulation on the way, we expect this industry to rapidly evolve, and we'll see continued innovation. A case in point is Jurni Network, which leverages the power of the Sabre GDS and our travel retailing skills to deliver a set of high-value services to leisure travel agents and suppliers.

As you know, the DCA 3 program was an important part of preparation for this new environment, though it did decrease our unit revenues. Our task now is to identify additional areas for revenue generation in this business. Today, our bookings these are just a small percent of the gross sales transacted through our network, and Jurni is just one way we can earn a greater share of those gross sales.

Let me just say that, contrary to popular belief, there is still a lot of opportunity in the off-line channel, and we will continue to innovate and implement new business models to develop deeper and more profitable relationships with our customers.

The next component of our plan is to reduce costs to enhance our competitive advantages. Our businesses will place a greater focus on cost competitiveness this year. We need to continually boost productivity, and ensure that our scale advantage versus our competitors is correctly reflected in our cost structure. The need to lower our cost structure is obviously particularly critical for Travel Network.

And finally, we must maximize the performance of each individual business. Individually, each of our businesses has the ability to excel in its targeted portion of the travel market. Our businesses also benefit from being part of a broader TSG portfolio that has great technology and intellectual capital, and we can leverage these strengths across businesses to create differentiation and significant value for our customers. We achieve the best outcome when we're operating at both levels, when the operating units are focused on maximizing their individual results and when we are taking full advantage of the significant opportunities for synergy. Our goal is to do both well. We also expect the individual business units to perform at a very high level, to consistently hit or exceed their plans for revenue growth and profitability.

And what that, let's turn to our Sabre Holdings CFO, Jeff Jackson.

Thanks, Sam. And I will start with the fourth quarter. Total Company revenue was 467 million, growth of 3.2 percent from the year-ago quarter. Earnings per share excluding special items are 1 cent, compared to 15 cents in 2002, and on a GAAP basis, we had a loss of 10 cents per share, compared to earnings per share of 1 cent in the year-ago quarter. For the full year, total Company adjusted revenue was 2 billion, a decrease of approximately 3 percent over 2002, and revenue on a GAAP basis was just over 2 billion, approximately a 1 percent decline year over year.

Earnings per share excluding special items were 83 cents, which was 1 cent greater than we gave on our guidance call in October, and this 83 cents includes 18 million in severance from the fourth quarter that we were not able to adjust, due to new specific SEC Reg G requirements. This 83 cents is compared to $1.79 a year ago. Earnings per share on a GAAP basis were 58 cents, compared to $1.50 in 2002.

Now, I'll move on to revenue and operating metrics by business unit. As a brief reminder, all of our fourth-quarter and full-year 2003 results include the integration of the GetThere business into the remaining three business units. 2002 has also been restated to reflect this change. The methodology of this asset (ph) placement was to reclass GetThere's corporate trip revenue to Sabre Travel Network's other revenue line, while GetThere's supplier revenue is now reflected in Airline Solutions. GetThere's technology development resources, assets and full-service offering product were reclassed to Travelocity's non-transaction revenue line. These resources and services will be sold by Travelocity to other business units at market-based rates.

For the full year and the quarter, I'll start with Sabre Travel Network. Sabre Travel Network had revenue in the quarter of 345 million, a decrease of 3 percent. Full-year revenue on an adjusted basis was 1.52 billion, a decrease of 7 percent year over year. And full-year revenue on a GAAP basis was 1.56 billion, a year-over-year decrease of 4 percent. Total global bookings processed in the quarter were 86 million, an increase of 2 percent, and direct bookings were 70 million, down 2 percent. For the full year, total global bookings processed were 366 million, a decline of 8 percent, and direct bookings were 309 million, down 9 percent. As we anticipated, our worldwide bookings share reached 36 percent by year end, 2 points above our share earlier in the year, and our year-to-date share is 35 percent.

Moving to Sabre Airline Solutions, fourth-quarter revenue was 59 million, an increase of 12 percent. Revenue for the full year was 232 million, growth of 7 percent. This includes revenue from the supplier GetThere business as a result of the integration.

For Travelocity, gross travel booked for the quarter was 991 million, almost 4 billion for the year, representing 12 percent growth for both periods. Travelocity had total revenue of 97 million for the quarter, growth of 17 percent. For the full year, adjusted revenue was 387 million, and I'd like to break this out in a couple of different ways. If you were to exclude the $27 million revenue impact of the GetThere integration, Travelocity's total revenue growth would have been 17 percent over the last year. Including the impact of GetThere, total revenue growth for Travelocity was 14 percent.

And now, to distinguish revenue between .com and our portal partners, year-over-year revenue growth for Travelocity.com was approximately 25 percent, while revenue from the portal partners declined 7 percent. Full-year revenue on a GAAP basis was 395 million, growth of 17 percent. Total revenue as a percent of gross travel booked for the quarter was 9.8 percent, and 9.9 percent for the year.

Now, to break down revenue further. Transaction revenue for Travelocity was 75 million for the quarter, an impressive growth rate of 50 percent, and for the full year was 289 million, over 34 percent growth. Even with the year-over-year revenue decline from our portal partners and the loss of hotels.com content, transaction revenue growth rate increased every quarter, from 25 percent growth in the first quarter to 50 percent growth in the fourth quarter. Non-transaction revenue, which includes average, corporate, international, joint ventures and other, was 22 million for the quarter, a decrease of 33 percent percent, and 97 million for the year, a decrease of 21 percent.

I want to go on to discuss transaction revenue further. On the air side, transaction revenue grew 24 percent for the quarter and 15 percent for the full year, while on the non-air side, transaction revenue grew 87 percent for the quarter and 65 percent for the year. Taking our non-transaction revenue one step further, our cruise, vacation, last-minute and TotalTrip category grew 123 percent for the quarter and 111 percent for the year. Including WCT, total hotel revenue growth was 86 percent for the quarter and 50 percent for the year. Our merchant hotel revenue, as a percent of total hotel revenue, was 58 percent for the quarter and 61 percent for the year, and our Travelocity merchant hotel room nights represented 56 percent of the total room nights by year end. Total merchant revenue, including air and non-air, as a percent of total transaction revenue, was 31 percent.

Now, I'll turn my remarks to expenses, operating income and margin for the quarter and for the year, starting with expenses. On an adjusted basis, total Company expenses grew 12 percent for the quarter and 10 percent for the full year. Total Company expenses on a GAAP basis grew 9 percent during the quarter and 8 percent for the full year. The biggest drivers of this growth were Travel Network customer incentives, advertising and promotion for Travelocity and data processing.

Next, total Company operating income and margin. Operating income on an adjusted basis for the quarter was 2 million. For the full year, operating income on an adjusted basis was 198 million, a 10 percent margin. And on a GAAP basis for the quarter, we had an operating loss of 22 million, and for the full year, GAAP operating income was 166 million.

Moving onto the full-year operating income and margin for the three business units. Sabre Travel Network finished the year with an adjusted operating income of 230 million and an operating margin of 15 percent. On a GAAP basis, operating income of 257 million and an operating margin of 16 percent. Sabre Airline Solutions had an operating income of 21 million and a margin of 9 percent for the year. Travelocity had an operating loss of 55 million on an adjusted basis. But keep in mind that 15 million of that is attributed to the GetThere business consolidated into Travelocity, 12 million is due to severance and a catch-up of the amortization of advertising expense taken in the fourth quarter, and the remaining 28 million is from core operations. The operating loss on a GAAP basis, which includes intangible amortization of 42 million, of which 25 million is attributed to GetThere, was 100 million.

Now, turning to other financial data for the year, our adjusted EBITDA ended the year at 302 million, and our GAAP net income was 83 million. Our free cash flow was 179 million, and cash flow from operations was 262 million. We ended the year with a cash and marketable securities balance of 923 million, and debt on the balance sheet of 589 million. During the fourth quarter, we spent $46 million from our $100 million authorization to repurchase 2.16 million shares.

Now, I will turn my remarks to the outlook for the full year 2004 and the first quarter. On our third-quarter call in October, we provided high-level expectation for 2004, to give you our preliminary thoughts for the year. At that time, we were in the middle of our budgeting process, the integration of GetThere into our other three business units and the acquisition of World Choice Travel. We are pleased these initiatives are complete, and are reflected in the projections I'm about to provide, starting with total Company. We expect revenue on an adjusted basis to grow approximately 4 percent to 9 percent, and on a GAAP basis approximately 2 percent to 6 percent year over year. Total company earnings per share, excluding special items, is expected to be in the range of $1.15 to $1.25, growth of 40 to 50 percent. And EPS on a GAAP basis is expected to be in the range of 94 cents to $1.04.

Now, I'd like to turn our 2004 assumptions on revenue, operating earnings and key operating metrics by business units, starting with the Travel Network business. Revenue on an adjusted basis is expected to be flat year over year. This assumption is based on a decline of approximately 2 percent on our air and non-air booking fee revenue, and growth of 13 percent in other revenue, which includes our joint ventures, emerging businesses such as Jurni Network and Sabre exclusives and revenue from subscribers. We expect a slight decline in revenue on a GAAP basis year over year. Operating margin for TN is expected to be in the midteens on an adjusted basis and the low teens on a GAAP basis.

Key operating metrics contributing to our revenue guidance within TN are a 4 percent price increase on our non-DCA three-year bookings, which translates into an effective price increase of 2.3 percent across all of our global direct bookings. The average global booking fee is expected to be $4.19 per booking.

We expect total direct global bookings, bookings in which we receive a booking fee, to grow approximately 1 percent year over year. Elements in this overall assumption are travel industry growth in North America of 6 percent, which includes the anniversary effect of the Iraq war in the first half of the year; Sabre's worldwide booking share remaining flat year over year; and channel shift from traditional agency to supplier direct of approximately 4 points. We expect total global bookings to grow approximately 3 percent over 2003 levels. Approximately 2 points of this growth is attributed to growth in non-direct bookings through our Abacus joint venture.

Moving onto Sabre Airline Solutions, revenue growth is expected to be in the low teens, with an operating margin of greater than 10 percent. Airline Solutions expects to achieve this revenue growth goal through aggressive product sales, improvements in the hosting business volumes and sales in high-growth markets. Approximately 70 percent of our planned revenue in Airline Solutions is already committed.

Now, turning to Travelocity. Travelocity revenue growth is expected to be greater than 30 percent on an adjusted basis, and greater than 27 percent on a GAAP basis. Travelocity's bottom line, excluding special items, is anticipated to improve by over 70 million, with a low-single-digit margin. Modest operating losses are expected in the first quarter, turning profitable in the second quarter. On a GAAP basis, Travelocity is expected to have a full-year operating loss of approximately 15 million.

Now, I'd like to spend a few minutes walking through the revenue and expense drivers behind the $70 million in earnings growth. Michelle will walk through the business and operating metrics in a moment.

On the revenue side, we expect revenue growth of over 30 percent, or over 110 million year over year. A significant portion is driven by yield improvement from increased merchant mix, much of which falls to the bottom line. In addition, we will continue to make strides on volumes driven by overall industry growth in online travel, Travelocity product enhancements and growth in our product lines of business -- packaging lines of business. Also included in this projection is revenue from the WCT acquisition and the GetThere business. Our fourth-quarter transaction growth rate of over 50 percent gives us comfort that we can achieve this goal.

From an expense perspective, Travelocity expense growth has slowed to approximately 10 percent or approximately 40 million, helped by expense reduction of approximately 35 million from the following categories. First, through the consolidation of GetThere within Travelocity, we have taken out significant costs in our corporate line of business. Second, we have already taken steps to address our portal relationships, which Michelle will expand upon in a few minutes. Third, we have taken steps to reduce our fulfillment costs, through technology and process improvement which will result in cost improvements of over 20 percent. In addition, we continue to focus on efficiencies and eliminating costs in all areas of Travelocity.

Now, I'll address expenses for 2004. If you recall, we launched a cost-cutting initiative in the fourth quarter, and we expect to generate savings of approximately $80 million. We expect our total expenses across TSG to increase approximately 100 million in 2004, due to increases in data processing, customer incentives, advertising and promotion in Travelocity and other miscellaneous items. We expect full-year adjusted EBITDA will be approximately 350 million, and GAAP net income will be approximately 140 million. Free cash flow will be approximately 180 million, and cash flow from operations will be approximately 275 million. For the first quarter, we expect revenue to be 510 million to 530 million. We expect EPS, excluding special items, to be in the range of 24 cents to 27 cents. We expect EPS on a GAAP basis to be in the range of 18 cents to 21 cents.

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

Thank you, Jeff. As you know, Travelocity spent much of 2003 in investment mode, building a solid foundation for profitable growth. While we are not satisfied with the financial results in 2003, we certainly feel good about core Travelocity revenue growth and the operational progress we made. We built a product manufacturing engine that puts us squarely in the most profitable space in the travel market, the merchant space. We have done this by launching our own dynamic packaging engine, our own merchant hotel operation, and by rapidly growing our last-minute deals business. We invested in technology and architecture that will make our site faster and more flexible. We took the time and the discipline to invest in supplier-friendly models in all of our business lines, which means that our pricing and availability can be sustained over the long term. We developed new distribution outlets. Key among them is the business travel market through our Travelocity business offerings, which I will discuss further shortly. Other distribution outlets are high on the priority list, from growing the World Choice Travel affiliate networks that we recently acquired to improving the productivity of our existing portal partnerships. In addition, sustaining the Travelocity brand is one of our most important assets, and maintaining its vitality is something we will continue to focus our energies on. I'll talk more about our forward plan and branding in just a moment.

In the last quarter of the year, we began to see some of the fruits of our investments. I'm going to walk through the key operational highlights of our business, and the proof points that our decisions in 2003 have begun to pay off, and will continue to do so at an accelerating pace in 2004. First, a note about our brands. In October, we were excited to announce that Travelocity had selected a new creative agency. The agency came up with a fantastic campaign featuring the Roaming Gnome, which will not only relaunch the Travelocity brand, but is designed to differentiate us from our competitors.. We will be accelerating our branding budget to support this campaign, and feature a series of advertisements in online and off-line media outlets. The ad launch has been preceded by a three-week pre-publicity campaign, and early indications are that the campaign is highly viral, and being very well-received. While there are many ways we will measure the success of our campaign over time, it's certainly promising that our site sessions in January are outpacing our plan.

As Jeff mentioned, our hotel business registered impressive growth statistics in the fourth quarter. Total room nights across the entire Travelocity network were up year over year by 36 percent. We ended the year with merchant accounting for 56 percent of room nights in December, which is a dramatic improvement over year-end 2002. If we include WCT, our merchant mix is 45 percent for the fourth quarter. Our merchant hotel's consumer success is due to hard work behind the scenes. As of today, we have hit over 10,000 operational properties in our merchant programs, bringing us to numerical parity with our major merchant competitors.

The numbers are just part of the story. There's also the quality of the numbers, and in the fourth quarter, we signed a merchant agreement with Marriott International, making Travelocity the first and only online agency to have the Marriott brand in its merchant program. As of today, over 400 Marriott properties are available throughout our sites.

Some other key fourth-quarter milestones for our hotel business include completion of the WCT acquisition, which adds 1,750 online affiliates operating 2,900 Websites to our hotel distribution network. Since the acquisition, we've been focused on getting Travelocity's merchant hotel products flowing through the network, and we are pleased to report that this project is complete. The WCT network have exceeded our expectations to date.

The fourth quarter also saw the launch of Travelocity's new hotel architecture. We redesigned our hotel passes to significantly improve usability, performance, functionality such as advanced sorting, and lightning-fast speed.

I'd like to turn, now, to our packaging business, which we call TotalTrip. TotalTrip continued its strong customer acceptance trend in the fourth quarter, with package sales ending the year over 300 percent above the previous year. Travelocity's new dynamic packaging engine, which we launched in June, continued to beat the conversion and sales rates of the previous Travelocity vacations platform by almost five times, with significantly lowered operating costs. With the TotalTrip engine, we have increased the percentage of online sales to 85 percent, up from 45 percent in the old vacations technology, which obviously will generate call center cost savings and efficiencies. In November, we enhanced our TotalTrip cross-sell functionality, which merchandises package to stand-alone air pass shoppers. We've seen a boost in our TotalTrip sales from this effort.

Let me also just spend a moment on the second element of our packaging business, Site59, which is our last-minute deals business. We saw a continuation of over 150 percent year-over-year revenue growth at Site59, due to our superior consumer proposition versus the competitive set. All this progress and investment on the leisure side contributed to Travelocity transaction revenue growth of 34.4 percent in 2003 over 2002. And if we exclude portals and GetThere, total revenue for Travelocity.com increased approximately 25 percent for the year.

Let's move away from leisure for a moment and take a look at Travelocity's progress in the corporate market, which we view as having long-term earnings potential on par with that of the leisure market. We continue to make steady strides in our offering to corporations under the Travelocity business brand. We've consolidated GetThere's product marketing and develop responsibilities into Travelocity. We'll see the benefits of this combination by sharing development across both platforms, and by bringing some of the richness of the Travelocity user experience to GetThere's corporate customers and GetThere's travel management policy capabilities to Travelocity. Operationally, Travelocity business signed on numerous corporate customers, in addition to several new supplier agreements. All this positions us well for 2004.

To wrap up, I want to give you a sense of what to look for operationally in 2004. First and foremost, 2004 will be the year where we reap the benefits of much of the 2003 investment I just described. We are confident in our ability to achieve profitability in 2004, while continuing to grow the corporate and international businesses.

To recap the key opportunities that will drive our earnings in 2004. Revenue will increase by over 30 percent year over year, through brand investment and continuous innovations to improve functionality and usability. We'll accelerate our transaction revenue growth, due to the rapid growth of our merchant businesses, TotalTrip, merchant hotels and last-minute deals. We will exit 2004 with merchant hotels accounting for more than 65 percent of our total room nights, excluding WCT, and more than 50 percent if we include WCT. Packaging revenue will increase to 15 to 20 percent of total transaction revenue in 2004. We will complete product investments in our non-merchant products, particularly air, which is still an important asset to drive traffic and create cross-sell opportunities. Of particular note is the revamped site architecture which we will release in the second half of 2004. We will invest in and differentiate our consumer brands, and we will aggressively take costs out of our P&L where it makes sense to do so. We will remove costs from our operations and also from customer acquisitions. Portals were a significant portion of our losses in 2003, and our portal expense was out of line with today's markets. I am pleased to announce today that we have already taken action here, and we have concluded negotiations to expand and revise our AOL portal deal. We have worked with America Online to structure an agreement that is reflective of today's market, with economics that are beneficial to both companies. This will result in significant savings for Travelocity over the final year of the previous agreement, the savings commencing in the second quarter of 2004. With these revised economics, and the fact that AOL and Travelocity highly value this relationship, both companies agreed to extend the relationship for an additional year, through March of 2006. These revised economics will play a vital role in our profitability in 2004. We've already taken costs out of the GetThere business, due to the integration, and we will reap the benefits in 2004. We've also taken action to reduce our customer fulfillment costs, and as a result, we will see over 20 percent reductions in our unit fulfillment costs in 2004.

So, while we certainly see the challenge we face from a profitability perspective, we are very confident that our targets are achievable. In 2004, top-line growth will happen on the foundation of investments we've made and via higher-quality growth sales. Bottom-line growth will come from a rationalized expense structure. I look forward to a prosperous year for Travelocity, our customers and our investors.

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

Thanks, Michelle. Before we open it up to Q&A, I'd like to summarize a few key points. First of all, 2004 is all about profit expansion and execution in each of our businesses, and we put the foundation in place to do just that. And I would be remiss if I didn't share just one more mind-numbing statistic, and that would be 38. 38 is the number of weeks that Karen Fugate, our Head of Investor Relations, has been pregnant. And all of us at Sabre Holdings are very grateful that she has scheduled the birth of her second child until after our earnings call. So thank you to Karen, and with that, we will take your questions.

(OPERATOR INSTRUCTIONS) Davids Richter, Smith Barney.

I just got a couple quick ones. Sam, you mentioned about the incentive fee part of the business. Did you say that you felt like that was kind of finished going up, or did you actually think that that was going to be coming down? And what is really included in the 2004 numbers, in terms of incentive fee growth or kind of contraction?

What I had said was that our intent and our plan this year is to slow the rate of growth of incentives. And so we'll do that through some of the initiatives that I talked about. I mentioned that we're going to announce here in this quarter a structured incentive program. And so, certainly, our full intent is to take incentives down through those types of programs. We fully believe that, based on where things have gone in the marketplace, DCA 3 is probably the best example, and given the fact that our competitors have really followed our lead as it relates to pricing the airlines, that there will be this pressure on incentives across the marketplace. And we've built that pressure and the benefits of that pressure into our full-year numbers.

Sam, let me just add one thing. In October, David -- and this remains the case -- when we talked about this, we said $50 million on a $400 million base. That remains the assumption in our plan, but that also includes incentives paid by TN to Travelocity.

And just one last one for Michelle, I guess. What are you assuming in terms of savings in the last year of this AOL contract? And I just went to confirm that that was -- was that guidance -- was that included in the guidance you all provided in the third quarter, or is that kind of newly incorporated in this new guidance?

The savings was built into the range that we provided. We have not broken out the specific numbers, but it is significant savings, and that will be made available in the 10-K down the road.

Tom Underwood, Legg Mason.

Michelle, actually a question for you. I was just wondering if you could comment in terms of, number one, for your hotel room nights, if you could give us any absolute figures for what were booked? And then, what you're seeing in terms of rates and margins?

We will be providing room nights in the first quarter, but not for this year. We did mention it's a 36 percent year-over-year increase, which I believe is greater than the current industry trend. In terms of margin and ADR, Tom, that's not a number that we break out; but we feel very good about where we are and where we have been all year on those dimensions.

Could you just say how they are trending throughout the year?

I don't think we provide that information. The margin, however, is certainly hitting where we expect it to be.

I guess this would be a question for either you or for Sam. What do you expect, right now, for an advertising budget for Travelocity for the year?

Tom, we have not broken that out in the past, and we don't plan to here in the future. What I will say is that we do have an aggressive campaign surrounding the Roaming Gnome, that Michelle had talked about. We've talked about a number there related to the campaign of $80 million. And so that is our preliminary view of spending for that campaign. That's all, though, that we're talking about, in terms of advertising spending, although you can expect that it's up year-over-year, and up fairly dramatically.

And just finally, with the new hotel path -- I know it's only been out there a little while, but any metrics in terms of whether you're seeing an improvement in conversion or visitation, or anything else along those lines? I guess conversion would be the one that would be easiest to isolate.

Tom, it's too early to tell, but I will say if you've shopped around, it's a terrific functionality. Some of the things that our consumers have asked for, like advanced sorting, faster time between pages -- all of that is incorporated into the new hotel pass. I'll also say it's on our new architecture, which reduced costs for us as well. It's too early to give any indication on conversion, but we certainly feel very good about meeting consumers' needs that they've been asking for.

Jim Kissane, Bear Stearns.

Sam, can you elaborate on some of the factors that have caused channel shift to moderate? And it sounds like you're assuming that's going to bounce back up in '04 from '03.

Well, most of what I will tell you here is more intuition, as we've been looking at the numbers, and we've been attempting to get down to levels of granularity that will tell us more. But the first intuition is that, as we've had all of those fares from the DCA 3 relationships that we struck in our system, it encourages more people to book through Sabre and through GDSs in general than we've seen historically. So, as an example, corporate travel -- I think you would imagine that, over some period of time, given all the consternation that occurred out there in the marketplace, with corporations who wanted access to all fares but weren't getting them, that they now have access to all of them. They don't need to go around the system; their employees don't need to go around the system. So that's one aspect, I believe, of what we are seeing out there. But again, we're still studying, we are still analyzing the numbers. But to reiterate what I said before, what we have been seen historically is a channel shift of roughly 5 points. We have seen that more in the 3 to 4 point range over the last five or six months, and our expectation is that -- and we built into our numbers about a 4 point channel shift, as Jeff mentioned. We expect to see that trend continue, I guess, and that's why we've built 4 points into our plan, versus 5 that we've seen historically.

But if corporate travel picks up in '04, it is safe to assume that channel shift would continue to moderate, right?

I think that's safe to assume. Again, if my theory -- if my intuition about channel shift is correct.

Jim, I went through and elaborated on each of the assumptions underlying our TN revenue growth number. There were three specific ones. Lets just hope we're conservative on this one.

In terms of incentives, if everyone had a derivative of DCA, why wouldn't there be continued upward pressure on incentives?

Well, because we are all in a situation where we need to take costs out to maintain profitability or improve profitability. So, you'd see that at Galileo, you'd see that at Worldspan. We've all really moved into this marketplace where we're providing discounts to airlines through these types of programs, and when you do that, you've got to take costs out. What that means, because incentives are such a large portion of our costs, that means that we'll see pressure on incentives. And I think the good news there is that we've got a fairly disciplined set of competitors out there in the marketplace.

And just one last question, Sam. How much flexibility do you have, given the DCA agreement that you have with the majors in the United States and I guess British Airways as well, to change pricing and how you look at your business later this year, given deregulation will allow you to bias the screens -- have biased screens, I guess?

We'll be looking at new business models, and have been, as it relates to what deregulation means. I think we will -- as opportunities arise, and as we think there are opportunities to build a deeper and more profitable relationship with our airline customers, we will engage with them. We clearly have three-year contracts in place with the DCA 3 carriers. So we'll obviously be honoring those. At the same time, there may be opportunities for each of us in those relationships, for us and our airline partners to improve upon that relationship. And if we both find it to be beneficial, then we may enter into a new relationship or a new contract.

So you have not lost flexibility?

No. I think we are in the same position that we were in before.

Chris Gutek, Morgan Stanley.

A couple of questions. First, Sam, you talked in general terms about some of the cost-cutting and cost savings opportunities. Can you be a little bit more specific on where you see the opportunities? Specifically, are these wholesale changes in the business model, or just some fine-tuning and tinkering? And would it be possible to give at least a rough quantification for the magnitude of cost savings you're looking at for 2004?

Well, we've talked about the costs that we've already taken out of the business and built into the plan for 2004, and I'm not going to enumerate on some of the initiatives that we have underway. But if you look at last year and this year, this year versus last year, you'd see that we saw savings in terms of headcount in the $50 million range, facilities in the $10 to $15 million range. But we'll be looking at other aspects of our business to understand how we can take more costs out. I mentioned incentives, and clearly that's one of the focus areas. But we have four or five other areas that are a part of what we call our cost leadership program within Sabre Holdings. And so that's about looking at how we can take costs out of things like our data processing, so, as you know, we have been investing in ATSE over the last couple of years, and we'll continue investing in that. And in fact, we have some duplication of costs related to data processing that will continue on into 2005, at which point we'll begin to reap the benefits of those investments. But we will -- and so we'll see improvements as it relates to data processing, and that is certainly a very large focus area for us. We've already talked about the benefits of AOL that will begin as we enter into the second quarter. We're also aggressively looking at fulfillment costs as it relates to Travelocity, but even our larger Sabre Holdings business. And then, last, I would say we're looking at our SG&A, and we're looking all over the business for opportunities to reduce that SG&A.

And then my other comment's related to the comment that 50 percent of bookings will be through the DCA discounted program by the end of the year. It seems to me this is probably a higher number than we would have guessed on the third-quarter conference call. It seems as if you're now inclined, therefore, to offer DCA price discounts to most of the major European carriers. I'm curious. What is the motivation for offering this discount to all the European carriers? To what extent what you expect that pricing pressure to spread fully globally? And finally, can you comment on Amadeus's pricing plan of differentiated pricing based on complexity, and how that is being received by the customer base?

Well, first of all, we are now slightly above 40 percent, in terms of that mix of carriers, mix of bookings that are through contracts with DCA 3 participants. So moving to 50 percent isn't that large a jump. We don't have any plans, as I mentioned before, that while we are talking with a few international flight carriers, we have put a stop sell on that program. So we don't expect to introduce that with or announce many more agreements that are DCA 3 participants, at least for the time being. And we have that flexibility; we can review that again over time. So I would expect that we will bring some of the negotiations that are in work to fruition, and that may mean the announcement of several additional participants. We don't plan to introduce this in the Asian marketplace, as another example. So I think that, again, being at 50 percent is not far from where we are today, and it's just reflective of introducing a few new participants into the program.

Greg Gould, Goldman Sachs.

A question on acquisitions, Sam. Can you give us some thoughts on how you would prioritize acquisitions in 2004, versus the other initiatives that the Company's focused on?

Only very broadly, and that is that we explore opportunities as they arise. And beyond that, we don't really comment on it. Certainly we have, as was the case with World Choice Travel -- we've looked at these opportunities. We've evaluated them. We have a very disciplined financial approach to looking at these types of transactions. We think WCT is going to be great, and it's an example of the type of acquisition that we look favorably upon. One is increasing distribution breadth. Another is improving content. We typically do less in terms of -- or at least spend less time on technology-related acquisitions, although one recently -- one recent acquisition was Nexion, which provided us with great technology for our Jurni Network introduction.

But in general, is the focus going to be more on internal execution, particularly in the first half of the year?

Well, clearly that's a huge focus for us. And like I say, we look at acquisition opportunistically. So we are clearly spending most of our time on executing to the plans that we've laid out here on the call.

Scott Barry, Credit Suisse First Boston.

Two questions, one on STN and and the other on Travelocity. On Sabre Travel Network, could you just talk from a high level what your thoughts are regarding increased potential for agency bypass, given a couple of things -- one, increasing channel conflict; two, your efforts to introduce incentives; and then, three, what seems to be increased availability of supplier-direct conductivity going forward? And then, related to that, what your thoughts are on increased Direct Connect enabling, particularly among non-DCA-three-year participants, who are now absorbing further segment fee increases? And then on Travelocity, you see '04 low-single-digit margins. Can you maybe talk about where you see that trending longer-term, given your supplier-friendly operating model and the fact that you still are lagging from a share prospective?

Okay. Well, let me first talk to the question of Direct Connect. I think one important indicator of where things are going with Direct Connect comes right back to that channel shift comment. And if, in fact -- if there were dramatic or significant efforts or achievements underway as it related to Direct Connect, we'd be seeing different numbers in terms of channel shift. I have always said that I think Direct Connect is not about technology, it's about the business model. And so I think that in many respects, as we have introduced new pricing to airlines -- DCA 3 is an example -- as Travelocity has gotten very close with suppliers, airlines, hotels and otherwise, we found that the rhetoric, the noise level associated with Direct Connect has dropped dramatically. So we're really not seeing many efforts, and certainly not many successful efforts as it relates to Direct Connect.

Having said that, there are a few travel agencies that have done some work in that area. But again, one in particular I can think of, we've actually seen bookings and share growth with one of those that has experimented with Direct Connection. So not an area that I'm particularly concerned with. We will continue to watch it, and we will continue to look at the opportunities to introduce new business models, should there be better ones out there. Let's see. I think your other question was around incentives. We are focusing primarily on the small- and mid-size travel agencies, similar to the success of our Simplicity program, which is focused on primarily the smallest agencies. We are really focused there. Those types of agencies certainly have less motivation and resource to be looking at things like Direct Connect.

On the Travelocity point, I'll just flip it to Jeff.

Scott, if you go back to my remarks and the trends that are implied there, the bottom line here is I think we -- in 2004, we've seen both step function changes in cost and leverage on the revenue side of the model through volume, through merchant mix and a couple of other factors. We're not talking about 2005 yet, for sure, but I see those trends continuing. And frankly, I expect to see our margin continuing to grow on a year-over-year basis.

And just to add one comment, supplier-friendly absolutely does not mean lower margin. We invest in things like better technology to get better pricing, better availability from our suppliers. We've seen that borne out over the course of 2003, talked about room growth better than the market. We fully expect to see that in 2004.

Sure. Just as a follow-up, Sam, on the Sabre Travel Network, isn't it fair to say that the revised operating model there is based on really differentiating STN, differentiating what has essentially become a commoditized product from the agency's prospective?

Well, clearly, we need to differentiate from a product prospective. And that's why we continue to roll out innovations like Jurni Network. Now, there's an example where -- in a world where incentives need to come down, there's an example where we offer the opportunity for travel agencies to make money in different ways. So we have preferred supplier arrangements where, based on the volumes that they drive, they can earn more. We have merchant product offerings that they can sell. Again, these are pretty leisure-focused agents. So we are offering and continuing to offer products that help agents grow their business profitably, and so I think that's a large part of what we need to do here. I think most agencies, as we've looked at and understood how they value the services we provide and the economics of our relationships, they are really looking for the products and services even before they are looking to the incentives; at least, that's what they've told us in our survey work. So we think there's a lot of opportunity for differentiation. There always has been. We have differentiated more than others based on product and on service, and we'll continue to do that.

Michael Millman, Millman Research.

I wanted to ask sort of a general question on Travelocity. It seems that you're suggesting growth kind of in line with the market. You're spending some unknown amount of money marketing, but it looks like, for example, Expedia is spending even more money doing that. How do you regain market share in that business? And also, maybe you have a lot to glance at, but why aren't hotels demanding that you share some of the profits on the merchant programs with them?

Michael, let me say a couple of things, and then Michelle will jump in. What we're saying we're going to grow in Travelocity and all the different lines of business is greater than 30 percent. The market growth rates are all over the map. I've seen a lot that are in the mid-20's to 30 percent, and I'll let you reach your own conclusion there about share. But one other thing I'd like to add is, in our situation, this is the first year with this breadth of hotel content and the packaging capability. And so you have not only a volume kick here, but a mix opportunity that really allows us to lever off of a reasonably fixed cost based and in fact, in our case, some really attractive opportunities on the cost side, as well.

And one comment on the brand differentiation point and the marketing spend -- one of the things that's fascinating about this industry is that there's very little online loyalty. Customers switch sites. We are very excited in 2004 to build a true online brand. Our campaign is unique, it's differentiated. It's getting very well received in the marketplace so far, and this is really just the first step in relaunching the Travelocity brand. We feel very good about the campaign design, which is to differentiate ourselves. So we feel that the $80 million we're putting into the campaign will be very effective.

Secondly, on your point about sharing margins back with hoteliers, we entered into a relationship with every single hotel which is mutually beneficial. 10,000 of them have signed up this year alone -- over the past 15 months, that is -- which is a lot faster than what our competitors achieved. And they're signing up because they think that the value that Travelocity provides is greater than the cost for distribution. We continue to be impressed by the number of hotels that want to enter into distribution agreements. We look at those each individually, as they do us. And I feel very good about the transfer of value back and forth.

Well, with that, Mr. Gilland and our host panel, there are no further questions. I'll turn the call back to you.

Thank you, Brent. And thank you, everybody. We'll see you in about 10 weeks.

Thanks, everybody.

And, ladies and gentlemen, your host is making today's conference available for digitized replay for two weeks. It starts at 1:30 PM Central Standard Time, January the 22nd, all the way through 11:59 PM February the 5th. Please access AT&T's executive replay service by dialing 800-475-6701. At the voice prompt, enter today's conference ID of 716675. Internationally, please dial 320-365-3844, again with the conference ID of 716675. And that does conclude our earnings call for this quarter and full year. Thank you very much for your participation, as well as for using AT&T's executive teleconference service. You may now disconnect.