Sabre Corp (SABR) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. Good morning and welcome to Sabre Holdings Corporation's conference call to discuss the first quarter 2004 results. At this time all participants are in a listen-only mode. However, later we will conduct a question and answer session and those instructions will follow at that time. If you should require assistance during the call, please press star then one on your touch-tone phone. And as a reminder this conference is being recorded on April 22, 2004 , as well as being broadcast live over the Internet. With that being said, I will now turn the call over to Ms. Karen Fugate; VP of IR for Sabre Holdings. Please go ahead ma'am.

Thanks, Brent. Hello everyone. Thank you for joining us today. I am here with Sam Gilliland, our CEO, Jeff Jackson, our CFO and Michelle Peluso, the President of Travelocity. Sam will review highlights for the quarter. Jeff will review our results in more detail and Michelle will provide an update on Travelocity.

But before I get started I would like to remind all of you that some of our comments on matters such as forecasts revenues, earnings, bookings, operating margins, and cash flow, contracts or business and trend information will 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-K filing with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliations of our special items, non-GAAP financial measures in our earnings press release and on our website at www.sabre-holdings.com/investor.

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

Thank you Karen and thank you all for joining us. We had an excellent first quarter with EPS and revenue above our original guidance. We are pleased to see demand up in the travel industry and that momentum coupled with delayed spending drove our strong results for the quarter.

You may recall when we talked in January I said that our focus for 2004 was all about executing on our plan and increasing profitability. That commitment hasn't changed. We are on track for Travelocity to achieve profitability in the second quarter and across our businesses we are making good progress on our core strategies to achieve growth and leadership in travel commerce.

As a reminder, those core strategies are; To excel at travel retailing; To unleaseunleash the full potential of the GDS; To reduce cost to enhance our competitive advantage and; To maximize the performance of each individual business. I'll talk about some of the progress towards these and the highlights of the quarter and in a few minutes Jeff Jackson will provide details on the numbers and then Michelle Peluso will review Travelocity.

Before I get into the highlights of the quarter, let me start by saying that just this morning we announced another share repurchase program of $100 million. We are pleased to continue to enhance share holder returns through both stock repurchases and dividends.

Turning to business activity in the first quarter, in our Travel Network Business we continued to make progress in our transformation for deregulation. Our core strategy, again, to unleash the potential of the GDS includes implementing new business models. We are seeing encouraging early results from our Jurni Network Business. We signed up 54 preferred suppliers. And while we know that it will take time to see significant volume we are excited about the new revenue opportunity that Jurni provides. An example, for a travel package sale, our revenue moves from the traditional $7.50 booking fee to nearly $28.

Taking a look at channel shift, we continue to see encouraging signs that channel shift is slowing, we believe, fueled in part by the DCA 3 program. It has gone from running at about 5 points in the first half of last year to being in the 3 to 4 point range in the past few quarters, with some months as low as 2 points . We are also seeing good results with our GetThere offerings. We registered our first ever 1 million transaction month in March and processed over 3 million transactions during the first quarter , up 35% year-over-year.

The TN business also rolled out its Assured Advantage Program as a means to help slow the growth of incentive costs. As you'll recall, the contract offering is for small to medium size travel agencies and we're seeing a good trend. Contract renewals have continued at the same rate in this agency segment as before we launched the program. And, again, these are agencies that have agreed to trade off incentives in exchange for more flexible contract terms, superior content and an overall product solution. We are pleased with the results so far, but this is another program that will take some time before we see meaningful financial impact.

Moving on to Travelocity. We took a number of actions in support of our strategy to excel in travel retailing with the impact being seen in the areas of merchandising our high value products, brand differentiation , new distribution channels and growing international presences. Michelle will go into this in more detail, but I will hit on some highlights .

We completed a major redesign of our website. External research has shown that consumers prefer the new version more than 2 to 1 over the old one and over competitors. Travelocity Europe made two acquisition gaining both content and distribution in 2 of Europe's largest travel markets, France and Germany.

We also rolled out new technology, including revamping our hotel shopping engine. Customers can now tailor their search for a hotel in virtually any area. Travelocity business continued to expand its hotel offerings announcing deals for unique pricing and discounts from Best Western and [Utel]. Finally gross bookings exceeded $1.1 billion a 28% growth year-over-year.

Looking at Airline Solutions, we saw good progress in expanding our business with low cost carriers, the fastest growing segment in the airline industry. We're very pleased to have signed up Frontier Airlines for a multi-air, multi-product agreement, which includes SaberSonic, our New-Generation Airline Passenger Solutions Suite. This agreement represents the largest [INAUDIBLE] system conversion in the North American market in several years. We also announced a 5 year agreement with WestJet to implement the Sabre Resource Management Suite. These wins are good additions to our portfolio of customers in the low cost carrier arena, such as ATA Airlines, and Southwest Airlines. We are also pleased to see passenger boarded volume was up 16% year-over-year.

But in closing this airline solutions update, I'll just add that we do have concerns about the lengthening sales cycle in the our Products and Services Business and therefore, we are watching sales carefully this quarter to be sure revenue meets plan in the back half of the year .

Before we move onto Jeff, I want to make one more point about our focus on reducing cost. Earlier I mentioned the Assured Advantage Program as one example of this. Additionally, we took actions in the quarter to stream-line and increase efficiencies. We will continue these efforts to achieve our plan in 2004 and we'll have more to share with you later in the year.

So, in summary we had an excellent quarter, we saw strong travel demand, we're making great progress in Travelocity and we're executing on the plan we provided you at the beginning of the year and you are going to hear more proof points on that over the next few minutes.

With that let's go to Jeff Jackson for details on the financials.

Thanks Sam. I'll start my remarks with our revenue performance for the first quarter. Total company revenue for the first quarter was $540 million growth of 6.4% on adjusted basis from a year ago quarter and down.8% on GAAP basis. You will recall that in the first quarter of 2003, we received a settlement of $36 million that we traded as a special item. Earnings per share, excluding special items, were 37 cents, compared to 36 cents in the year ago quarter. And earnings per share on a GAAP basis were 31 cents, compared to 45 cents in the year ago quarter.

Next I'll move onto revenue and operating metrics by business unit and I’ll start with Travelocity. Travelocity had total revenue of $111 million, which represented growth of 29%.

Transaction revenue was $94 million, strong growth of 48% for the quarter. Transaction revenue as a percent of gross travel booked for the quarter was 8.3%, up approximately 1 point from the fourth quarter of 2003.

Nontransaction revenue, which includes advertising, corporate and international joint ventures was $17 million for the quarter, a decline of 26%, primarily due to the loss of Hotels.com warrants and continuing investments in Travelocity's international joint ventures.

Now, let me discuss transaction revenue in greater depth. On the air side transaction revenue grew 16% while on the non-air side transaction grew 95%, taking our nontransaction revenue one step further, packaging revenue grew 138% year-over-year and packaging revenue as a percent of total transaction revenue was 19%. This is at the top end of the 15 to 20% year end expectation we provided to you in January.

On the hotel side, total room nights across the entire Travelocity network were up 66% year-over-year and margins on merchant hotel agreements continue to meet our expectations. Total merchant revenue as a percent of total transaction revenue was 31% for the quarter.

Now, I'll move onto Airline Solutions. First quarter revenue from Airline Solutions was $60 million, an increase of 4%. We saw strong growth from the passenger solution side of our business as both passengers boarded and revenue grew in the mid-teens year-over-year. However, this growth was dampened by year-over-year decline in the products and services side of our business as we have seen customer sales cycle lengthen and the first quarter last year was a tough year-over-year comparison due to the addition of the TSA deal in that quarter.

Finally, onto the Sabre Travel Network business. Sabre Travel Network had revenue in the quarter $411 million, growth of 3% on an adjusted basis and a decrease of approximately 6% on a GAAP basis.

Booking fee revenue, both air and non-air, was up 6% year-over-year. However, this growth was dampened by the expected decline in subscriber revenue as we continue to move to unbundled subscriber contracts. Total global bookings process in the quarter were 105 million growth of 12% and direct bookings were 88 million up 9% year-over-year.

Breaking down to total global bookings. U.S. bookings grew 10%, international bookings ended the quarter up 14%, air bookings were up 12% for the quarter and non-air bookings were up 15%. For the first time Sabre GDS transactioned more than 2 million hotel bookings in a month, representing over 4 million Travelocity, Sabre Exclusive and published room nights. Our worldwide air bookings share for the first quarter was 35 %, up slightly from a year ago quarter.

Now, I'll turn my remarks to expenses, operating income, and margin for the quarter. I'll start with expenses. On an adjusted basis total company expenses grew 7.5% for the quarter and increase 6.9% on a GAAP basis. The biggest drivers of this growth were customer incentives and advertising and promotion for Travelocity. As we communicated previously, spending was below our plan for the quarter, however we do expect to return to plan levels for the remainder of the year.

Operating income, excluding special items, was $83 million with an operating margin of 15%. Operating income on a GAAP basis was $69 million, resulting in a 13% operating margin.

Now let me cover operating income by business unit. Sabre Travel Network had adjusted operating income of $84 million, which was a 21% margin and $81 million on a GAAP basis, which was a 20% margin. Sabre Airline Solutions had a slight operating loss for the quarter, less than $1 million. This loss was primarily due to a $3 million increase in a bad debt reserve due to increased aging of receivables from a few large customers.

Finally, Travelocity's operating loss on GAAP basis for the quarter was $11 million. But on an adjusted basis, the operating loss was $1.5 million, which was better than we had expected. And Travelocity achieved operating profitability for the month of March.

Now turning to other financial data for the quarter. For the first quarter EBITDA was $100 million and GAAP net income was $43 million. We have simplified our calculation of EBITDA and we’ll calculate it as operating income plus D&A, going forward.

Cash flow for the quarter was $56 million and cash provided by operating activities was $49 million. Also, we ended the quarter with a cash and marketable securities balance of slightly more than $875 million and debt of $599 million and net cash of more than $275 million. Our debt includes the carrying value of the Company's public debt of $435 million and $164 million capital lease obligation.

During the first quarter we spent the remaining $72 million from our $100 million share repurchase authorization, dating back to October 2003 and repurchase 3.34 million shares. In total since October of last year, we have repurchased 5.5 million common shares.

Finally, as Sam mentioned, we have received an additional authorization from our Board of Directors to purchase up to 100 million of common stock. The timing, the volume, and the price of any future share repurchases will be made pursuant to a 10 B5-1 trading plan.

And now on to the outlook for the second quarter and the full year. For the full year we are updating our EPS guidance provided on March 31. Our adjusted EPS will be in the range of $1.30 to $1.35, which compares to our previous guidance of $1.25 to $1.35. And GAAP EPS is now in the range of $1.09 to $1.14, versus $1.04 to $1.14.

The total company revenue, we are increasing our projection for the year and now expect it to grow approximately 5% to 10% on an adjusted basis, versus 4% to 9%, previously. On a GAAP basis we project revenue growth of approximately 3% to 7%, versus the previous 2% to 6%.

We are also increasing Sabre Travel Network’s full year revenue guidance to be approximately 2% growth on an adjusted basis, it was flat, and approximately flat on a GAAP basis. We now expect direct global bookings to grow approximately 2% year-over-year and total global bookings to grow approximately 4% year-over-year.

Revenue growth projections for our other business remain unchanged. Low teens growth for Airlines Solutions and year-over-year growth have greater than 30% on an adjusted basis for Travelocity. Greater than 27% growth on a GAAP basis.

We now expect full year EBITDA to be greater that $370 million, which is up from approximately $350 million and GAAP net income will be greater than $150 million. We also project full year free cash flow to be greater than $190 million and cash flow from operation to be greater than $350 million.

This full year guidance reflects a strong performance we saw in the first quarter and our assumption that expenses will return to plan levels for the remainder of the year. It also includes the year-over-year effect of the Iraq War and SARS beginning to narrow at the end of the second quarter and a return to more historical booking trends in the back half of the year.

For the second quarter, we expect revenue to be in the range of $540 million to $560 million or growth of 7 to 10% year-over-year. And we expect earnings per share on an adjusted basis to be in the range of 35 cents to 40 and EPS on a GAAP basis to be in the range of 29 cents to 34 cents.

Now I would like to turn it over to Michelle.

Thanks Jeff. We have some very strong results from Travelocity to share with you today, so let me dive right in. When I spoke to you last at the beginning of 2004, I told you that over the coming year we would begin to see the fruits of the investment we made in 2003.

I want to touch on a few of the things we said we'd do and provide you with the proof points that we are executing with lasers focussedfocused against them, on or ahead of schedule and with results at or exceeding plan. Most importantly, when I spoke to you in January, I told you that 2004 could be the year that our investors would see profitability from Travelocity.

Well, I am proud to announce to you the most important proof point there is. Travelocity achieved operating profitability for the month of March. That profitability, on an adjusted basis, was driven by strong operational performance on the key metrics of our business. I'll get to those metrics in just a few minutes.

In January, I said we'd see even more aggressive merchandising and site placement of our merchant products. Today, I will share some of the results of these efforts, which include strong growth in our highest margin businesses. We said that we'd continue to invest to improve site functionality and useabilityusability and that we would invest in and differentiate our consumer brand.

As you all know, we launched a completely redesigned and rebranded site on March 25. I'll walk you through some of the highlights of the redesign and it’s reaction from consumers as well as provide data on the site visitor boost we have seen from our new ad campaign .

We said that we would grow revenue at 30% for the full year and I’m happy to say we are on track with first quarter revenue growth versus the same period last year of 29% and with transaction revenue growth at 48%. In addition gross travel booked increased 28% over $1.1 billion. We said that packaging revenue would increase to 15 to 20% of total transaction revenue by year end. I am pleased to report we are well on our way. For the entire quarter, packaging revenues were 19% of transaction revenue and in March they were 20%.

Finally, we said we would take cost out of our P&L where it made sense to do so. We continue to drive cost from our operations, including transaction fulfillment and customer acquisition.

The key notes about our site redesign, which launched last month. we are very excited about the redesign and the integration of our new logo and we think it leap frogs us from an undifferentiated field of competitors to position of leadership in the areas of useabilityusability and appeal.

The new home page is cleaner, more direct and easy to use. The merchandising of our high margin products is integral to the design giving it a more intuitive and approachable feel. We independently tested the home page for layout, pallet and overall usability and the results were extremely strong on every metric.

Of particular note, Travelocity's new home page is preferred by more than two to one over our competitors. The boldness, energy and change you will see in the new Travelocity site is a good metaphor for the boldness, energy and change you will continue to see from Travelocity throughout the year.

Now, let's discussion the key revenue drivers of our business in the first quarter. Our visitor sessions are up a healthy 37%, versus Q1 2003, with even higher growth on Travelocity.com. We attribute this, in large part, to our new Roaming Gnome Campaign.

While we have certainly ramped our spending in support of the campaign, the ramp has been effective. We look at our spend effectiveness versus key competitors and the numbers look good. We are tracking very closely to our competitors media metric numbers for the first quarter 2004. While we don't place a great deal of emphasis on media metrics, we are pleased with our directional results for the first quarter.

Most importantly, we are pleased with the quality of our traffic. According to Nielsen Net Ratings, 11% of Orbitz visits in January were for less than 5 seconds, versus 5% at Expedia and only 3% at Travelocity.

Since the [INAUDIBLE] campaign launched on January 5, we have seen strong response and enthusiasm. People are talking about the campaign and by far the majority response has been fun and positive. In fact, in external testing Travelocity’s ad awareness increased 24% since the launch and brand [INAUDIBLE], a leading indicator of brand health and differentiation, has increased 24% as well. Our brand dynamism metric has increased 44%.

Having said that, the Gnome Campaign must and will strengthen and mature. Our focus groups in creative testing have shown the gnome as a powerful icon for grabbing consumer attention and standing out, but we are not satisfied. Over the coming months you will see the gnome linking great travel experiences much more tightly to Travelocity's role in delivering those experiences.

Turning to our high margin products during the first quarter we launched a new hotel architecture, which improved the hotel path usabliltyusability and performance. Medium response times on the hotel search return page decreased by almost 50%. With that said, we still see much opportunity to improve our product path and we will continue to be relentlessly focused on doing so.

In addition to path improvements, Travelocity added more than1200 merchant properties with lower package rates and total operational merchant hotel properties now exceed 11,000.

Additionally, as mentioned, package revenue is growing robustly, driven by better merchandising, the launch of Travel Extras and expanded offerings in our last minute business. In February, Travelocity launched Total Trip Travel Extras in 75 top destination, which lets customers add theme park tickets, ski passes and more to their flight and hotel packages. Over 30% of Total Trip customers now add an extra in key destinations.

On the last minute package side, we continue to see robust revenue growth. Flight 59 signed and integrated both United Airlines and British Airways and also launched nearly 30 new origination cities.

Turning to the cost side, as I mentioned earlier, we're moving aggressively down the path of taking cost out of our operations without risk to top line revenue generation.

On the customer acquisition side, the renegotiated AOL contract terms, which I reported at our last quarterly call, will help profitability throughout the remainder of 2004.

The economics we saw in the first quarter were and will continue to be bolstered by several key new merchandising initiatives which I want to run through briefly. In addition to the well integrated merchandising of Total Trip, many of the first gnome commercials have emphasized the new Travelocity is about more than airline tickets. The ads feature Total Trip and last minute packages communicating, not just savings, but the power to customize vacation elements.

At the beginning of March Travelocity also launched new merchandising pages, specifically designed as rival points for customers clicking through from search engines. We've seen conversion rates for these customers increase as well as relevant results were immediately returned.

In late March, Travelocity also launched an enhance cross sell tool to merchandise Total Trip packages to air only shoppers as part of their initial search result for flights, adding significantly to our high margin Total Trip sales.

In addition to our traditional channels for distributing the products we manufacture and merchandise, a big focus of 2004 has been expanding the number of outlets through which we access customers. I'll touch on three. World Choice Travel, which we acquired in 2003, Travelocity Partner Network and our international businesses. Looking first at WCT, we completed the integration of Travelocity merchant hotels into the WTC afilliateaffiliate network in mid-February. We will be launching Total Trip on the WTC platform next week, with last minute deals to follow quickly. All of this is helping to achieve our goal of taking our high margin products and expanding our distribution of them through WTC's fast affiliate network.

On a similar front, the biggest news from the Travelocity partner network is the announcement of our deal with Southwest Airlines. We are extremely proud of this partnership whereby Travelocity uses its industry leading cruise platform to power the cruise product on Southwest's site. Travelocity partner network will continue to be anareaan area of focus for us in 2004.

Before we wrap up, I would like to walk you through some of the progress we're making on our international businesses. In Europe, Travelocity continues to solidify its presence both through organic and acquisitive growth. I'll cover just a few highlights of our forward leaning stance in Europe. In U.K. , Travelocity launched a new advertising campaign featuring travel icon Allen Wicker. We are already seeing strong results of gross bookings growing more than %70 compared to 2003 .

In France, Travelocity Europe acquired [Vi Finance], which owns 10 travel agencies in major metropolitan areas, a tour operator, which sells vacations through 1800 travel agents and the Boomerang Voyage brand. Travelocity Europe also announced in March it will acquire a German online agency, Travel Channel .DE enhancing our position as the leading online player in Germany.

While we are certainly making progress in Europe this is a market where you will see us continue to invest and where we'll apply more management focus going forward.

Turning lastly to Asia, we announced that ZUJI has acquired [Next Door], an online player in Korea with a membership base of 500,000.

To wrap up, we're certainly excited by the results of Travelocity in the first quarter. We're on a strong upward trend in important business metrics and we're pleased by the value we’re delivering to both consumers and suppliers. While we certainly have a long way to go, we are very hungry to register continued successes over the coming months. I look forward to the next time we speak. Thank you.

Thanks Michelle. Brent, we would like to open it up for Q&A.

Very good and thank you, Ma’m. Ladies and gentlemen as you heard if you do have any questions or comments we invite you to queue up at this point. Simply press star then one on your phone keypad. You do hear a tone indicating you've been placed in queue and should you wish to remove yourself from the queue, simply press the pound key. To ask a question, press star one on your touch-tone phone.

Immediately we are showing a number of responses. First in queue is David Richter with Smith Barney.

Hey, guys. Just one quick one. Could you talk about your world partners and the volume through those guys versus the Travelocity proprietary site?

Sure, David. Travelocity, as you know, announced, last in January, that we were working very aggressively to take cost out of our portal partner relationships and we have achieved that with AOL and have been working with Yahoo as well.

The good new is last year on the year-over-year basis both of our portal partners saw declines in visitor sessions and transactions throughout the year. That has stabilized and we did see a very slight increase in the first quarter for both of our portal partners. Of course, Travelocity grew much faster.

Can you remind me how much the portals account for booking volume?

We don't break that out separately.

Okay. Thanks.

Next we go to the line of Jim Kissane with Bear Stearns. Please go ahead.

Jeff or Sam can you talk about channel ship a little bit more, the factors that are causing that to moderate. Is it more the DCA, is it more pick up in corporate bookings?

We think it is a number of things and it's a little difficult to pin point. But, I think the primary driver is that agents that otherwise had to go book outside the GDS channel in the past can now make all those bookings within the GDS channel. So that would be across the board leisure and corporate.

We imagine that, certainly, it has been very helpful in the corporate channel, simply because there were many corporations, number one, vocal about this issue and corporate travelers that were either booking themselves outside of their corporate travel agency or requesting that their corporate travel agency do that on their behalf. So I think it primarily is changing the agent behavior and allowing them to book all of that travel through their GDS.

Michelle can you hit on the merchant model? There has been a lot of talk out there about the hotels trying to reign in control of their rooms. The properties have control but the chains are trying to reign in the control. So can you address how this is going to impact your business going forward.

Sure, Jim. One of the good things about not being first to market in the merchant model hotels we were able to be really thoughtful about how to build the business model that worked, not just for consumers and shareholders, but also for chains and, as importantly, individual hotel properties.

So a lot of the discussions that you see in the chains and having with the press and also with third parties is really about things that Travelocity has actually already accomplished, things like booking through the property managements of some, taking both availability and pricing as well as delivering reservations through the property managmentmanagement, which Travelocity does, things like paying hoteliers on time, as opposed to waiting 30 or 60 or 90 days, which Travelocity does.

The good news is that I think by being thoughtful about our model a year and-a-half ago, we're seeing some of the benefit of that now. Having said that, in every hotel supplier, third party relationship, there's bound to be some sources of tension. Our job is to be as aggressive as we possibly can about adding value to the hotel partners we serve. They, obviously, have an opportunity to opt out of the program and to not participate if they don't want.

We have not seen any decline in the number of properties participating. As a matter of fact, we purposely tried to slow the number of properties we've added so we can focus on adding value for the properties we serve.

Equally on the margin side, we haven't seen any change in our margins in the past year or so.

The other thing I would just say, Jim, is that you likely saw the IHG, the intercontinental announcement, here earlier this week and I guess our view is that their approach and our approach, well their approach has changed, our approach is really business as usual. We started off with a supplier friendly value proposition and that will continue. For all the reasons that Michelle mentioned, I think we are in a good position there.

Sam, if I could get one more question? You have three months under your belt with deregulation. I know things change even more in the back half of the year, but any benefits so far, any negatives that you are seeing?

Well, I think its simply offering us opportunities to look at new business models. We introduced Jurni last year and that was certainly within the confines of the CRS rules. And we've seen good progress there and we think those types of models work in a deregulated environment and we think that we can enter into new types of relationships with airlines, whereby we can drive more value for them and in delivering more value, earn more value ourselves.

But having said all that, it is really July 31 that some of the primary rules associated with the CRS rules go away. The bias types of regulations, preferencing regulations go away in July. So I think there is more to follow on that front.

Thanks Sam.

Thank you Mr. Kissane. Representing Harris Nesbitt Gerard, we go the the line of Brian Egger. Please go ahead.

Good morning. Could you maybe update us on your expectations for GDS instead of (indiscernible) payment growth? I know there was some hope that that would stabilize with the implementation of the DCA program.

Actually, I had a follow up question too. On Travelocity could you give us maybe a little bit of context as to the materiality of the Roaming Gnome Campaign in terms of what that represents for Travelocity's entire advertising expenditure budget or some sense of that?

First of all what we've talked about in terms of incentive gross this year is about a 12.5% growth year-over-year. It is about a $450 million expense for us. We did implement DCA 3. And we believe that, not only as a high value to agencies, it’s a value that agencies are willing to pay for, in essence. Meaning, we think that and we’ve certainly heard that agencies would be willing to trade incentives for that type of content. Now it is a little early to tell here in the program as to whether we'll drive significant conversions out of that process but we think it offers opportunities there.

On the incentive front, I mentioned the Assured Vantage Program. And again it’s in the early stages. It is focused on the small and medium business market and while we're making good progress there and we are signing customers at the rate that we had been prior to the announcement of the Assured Vantage Program. It is going to be a relatively small financial impact in the short-term, simply because 25 to 30% of contracts are coming up for renewal in a given year and as we focus on small to medium it will just take some time.

So we're focused on it. We're making progress and we'll continue to make progress.

One other thing I would add just in the financial in the near term financial respect. That part of the goodness in the quarter that we experienced was a slowing of incentives in the quarter. We are expecting some of that to come back, but not all of it in, the latter half of the year.

On the Travelocity gnome campaign, Brian, what we have said publicly is that it is an $80 million campaign commitment all in and that includes spend that we will make offline as well as spend that we'll make online.

Thank you.

Thank you, Mr. Egger. We have a question from the line of Greg Gould with Goldman Sachs. Please go ahead.

Good morning. This is Andrew Lesberg for Greg Gould. First off, great quarter. My first question is for Michelle. In terms of Travelocity's revenue, which was great, how did it trend in the quarter? Did is it start off high, I'm sorry, did it start off low and work itself up towards the end of the quarter or did it start off much higher and work its way down towards the end of the quarter?

We actually had a good quarter in every month, which was terrific in year-over-year increases, that we were very pleased with each of the month of the quarter. Clearly there is a bit of a war impact in March on a year-over-year basis, but every month looks very strong.

My next question is regarding the Airline Solutions segment. Is there any pricing issues that are going on right now?

Pricing issues from what perspective?

In terms of competition.

Certainly, I think there is pressure as it relates to the Products and Services business. So we feel like we have the best portfolio in the business from a products and services perspective and clearly there is competition based on price, that being reflective even of the airline situation with fuel costs where they they are, they are going for that low price provider. So, while we would like to be commanding a premium in many cases just based on better functionality we are competing in many cases on price.

I would simply say we are winning in the marketplace when there are bids and what is driving the shortfalls we said in the comments is more about whether people are buying and/or delaying buying decisions, not price and not whether or not we're winning more than our fair share.

Right, so the total contract value of the deals that we did in the first quarter were less than we'd expect in the products and services business. That is not because we're losing in the marketplace as we compete for business. It is because those contracts have been delayed and moved out. So we feel like we've got a pretty healthy pipe line, but it is just a matter of delayed spending on the part of the airlines, late purchase.

Thank you.

Thank you very much sir. Representing Lehman Brothers we go to the line of Jeff Kessler now. Please go ahead.

Thank you. I'm interested in a couple questions. First, on the deal with Southwest powering the site for Southwest, is this a model for you to power other, so called, low cost airlines? Is this something that you can expand to others and perhaps build up your relationship with those types of carriers.

Last year, as you all know, we spent a lot of time investing in our product capabilities, and so we felt like in 2004 it was a good time to distribute those capabilities and those products to a wider audience.

We looked particularly for brands that have good brand loyalty with their customers, customers that we may not be able to access in other dimensions. Southwest is a really good example of a company with a strong brand and a loyal customer base. Clearly, they don't want to build a cruise product, so that the partnership made a lot of sense and we're pleased that it helps build a relationship with Southwest.

So, I wouldn't say there is a particular focus on low cost carriers. I would say there certainly is an emphasis on taking what we believe are increasingly world class products and distributing them more broadly.

Okay. The issue of incentives, we've touched on this briefly before, but it, apparently is going to become a bigger, perhaps, a bigger issue the year goes on and perhaps in the next couple of years.

Can you give us some update on where we are with the ebbs and flows of the debate over incentives with the agents and where do you stand to position yourselves and what you can offer them in exchange for, perhaps, a change in the incentive structure?

Well, let me just come back, again Jeff, to the Assured Vantage Program. Now, again, it is a start and we're making progress, but it is at the small to medium sized agency marketplace that we're focussedfocused on there.

But what we've done in that case is we've offered up less in the way of incentives but more in the way of flexible contract terms with those agencies. So, in the past where they might be concerned about shortfalls and they've been concerned about that over the past number of years, particularly given that we've had some fairly difficult situations over the past several years, we trade off things like shortfall terms within the contract for lower incentives and we also have other more flexible terms in those contracts.

So, they see there being an opportunity in terms of protecting their downside and they are willing to trade that off for the incentive line. So, it's a pretty good equation for them and we continue to have discussions with the larger agencies and are making progress there. So, you know, it is going to take time I think is clearly the message that we're providing today.

And the 12.5% growth rate that Sam referenced earlier, does represent a decline from the growth rate we experienced last year. I would say it is gradual we are in the mid to high teens last year. But it is a decline and we expect to keep hammering away at this problem and see declines in the future.

Decline in the growth rate.

I think the other thing that we should point out is that as our competitors have matched our DCA 3 program, we all are in a position where we need to take costs out, and in particular take incentive costs out. So, I think our view is that both DCA 3 programs and other cost pressures will force all of us to be more disciplined in the marketplace as we compete for new travel agency business.

It appears that we're gradually moving toward a situation in which these kind of flat or various negotiated incentives are moving more toward, we’ll say, performance based and contractual terms based on specific items in that contract. As oppose to…

Yeah, I think that's right athoughalthough what I would again, as I talk about Assured Vantage, the point there is that we're not really in the business with those contracts of negotiating. We've laid out better contract terms and we've laid those out in exchange for incentive reductions versus market. And again, we've seen our signings at a run rate that we saw before we introduced the program. So, renewals are coming in at the same pace. We think it is a good indicator, at least in the small and medium market, of where we can go.

One quick follow up to the question to Michelle on how Travelocity progressed through the quarter. You gave that guidance just several weeks ago, and obviously you've gotten to the high end or exceeded that guidance. I am wondering if the last portion of March for the GDS came in a lot stronger than you were even initially anticipating when you got your original information for the quarter?

No. Our bookings are not necessarily tied to what the GDS sees, because clearly, from a revenue perspective, as you know, for Travelocity it is all about selling our higher yield products. So executing on things like Total Trip in January and February affect March numbers and the same is true for other businesses like cruise where we are collecting cash after. So things like The Super Sale in February affect March numbers.

I'm sorry, I was actually asking about the GDS itself, not about Travelocity. I'm sorry. Did the GDS improve over what the company was looking at when it made its original announcement on guidance.

Yes it did. Our direct and our total bookings growth was higher than we expected in the quarter and we updated our range for the year on those two metrics. Jeff one other clarifying point at the macro level at it hits the P&L a vast preponderance of our incentive payments are still variable with bookings.

Okay.

Just coming back to your point about bookings in the GDS business. We had talked about flat bookings for the year and what we've now updated that guidance there so that direct global bookings will be approximately 2% growth for the full year, total global bookings at about 4% growth.

Great. Thank you very much.

Thank you Mr. Kessler. Next participant in queue is Michael Millman with Millman Research & Associate.

Thank you. I wanted to follow up on that and another question. Are you suggesting, or the numbers seem to suggest on the bookings that you are looking for 2 to 4% for the full year and you were much higher than that in the first quarter, do you see, and why do you see, a decline for the rest of the year?

And also on Travelocity, you mentioned that the new advertising programs improved your visitors. Could you talk a little bit about if you've seen an improvement and if so, how much so in transactions per visitor and if it is in line with what you're looking for? Maybe you can tell us, in fact, what you are looking for?

Michael, I'll take the first one. We're simply looking out at the back half of the year and our forecast is expecting that we'll have less of a year-over-year impact from the war in Iraq last year, which was principally a second quarter impact but also our year-over-year bookings came into the first quarter, particularly in March and SARS. So we kind of feel like we are going to return to a more normalized travel growth rate in the back half of the year and our forecast reflects that.

Maybe I need some clarification. The forecast is reflecting that you’d be down in the second half of the year-over-year?

We don't comment by quarter on specific direct bookings growth.

But if you're looking for 2 to 4% and you are now at kind of 9 to 10% for the first quarter, doesn't that seem to suggest that?

As I said we're not commenting on specific quarterly growth. I think we all hope that our forecast for bookings and revenue and earnings is conservative this year.

I think let me just add. I think, certainly, what we've seen, even as we've headed into April, we've seen bookings on a year-over-year basis that are pretty consistent with February and March and that's the good news. But, again, we don't have a lot of visibility into what we'll see in the back half of the year.

There has been noise, if you will, that makes planning and forecasting more difficult here in the first quarter just because of what Jeff mentioned, the Iraq conflict and SARS . So, really it is our view that the growth on the year-over-year basis will narrow overtime and come back closer to plan levels but, at least at this point, we've seen the trend continue into April that we've seen in the first quarter.

On the Travelocity ad campaign, first and foremost it is really too early to tell how it's going to affect things like loyalty. We look at three things, number one is how did we do against our plan for the first quarter. Obviously, we feel good about that. Certainly there is still a lot of work to do to hit our full year plan.

Secondly how do we do on brand metrics, which we have external firms evaluating all the time things like brand commitment, brand [INAUDIBLE], brand differentiation. The early results of those numbers are all very encouraging. Again. we are not satisfied with the campaign in it's entirety, we still think there is more of an opportunity to link Travelocity to the new adventures and we are working on that.

Finally, over the long haul, meaning over the next year to three years, we really want to start looking at things like loyalty and have we done a good job of increasing transactions for not just visitor but repeat customers and the kinds of products they're buying, particularly the high margin products. That's something we'll watch 12 to 36 months from now.

Thank you.

Thank you very much, sir. Next we go to April Henry with Morgan Stanley. Please go ahead.

Hi. My first question is on GAAP. If there are any integration costs that remain in the year? I notice at the end of the last year there were still some due in 2004 with respect to get there or restructuring. And in what quarters the rest of those costs might fall?

On the Travelocity side, two questions, one, now that you've already broken even ahead of schedule, do you have any revisions to your expectations for the long term profitability or actually I don't think you've actually disclosed that, so do you have any guidance for us on that for post 2004.

And then the second question on Travelocity is if you can give us any more specific idea of how bookings grew in the quarter if you were to exclude the slower growth portals?

April, I couldn't hear the last part very well. We'll tackle the first couple questions and then see if we can get you to repeat the last question.

Sure.

We don't have any remaining cost associated with the integration of Get There in 2004 so we're done with that effort. I will say that on terms of guidance for Travelocity it hasn't changed. We talked about 30% or more revenue growth and single digit margins for the full year. So it remains where we had placed it.

Can you comment on your long term outlook beyond 2004?

No we haven't commented on that as of yet. What was your last question.

If you could be a little more specific about the bookings growth in the quarter for Travelocity if you were to exclude the slower growth portal.

We don't breakout those numbers specifically, but as I did mention there was a slight increase versus year-over-year declines in 2003 for portals and that, obviously, implies that Travelocity grew at a more significant rate.

If I could ask one last question on the STN. Wondering how exactly you are taking share in Europe and Asia, in what manner you're strategy is working?

Well, in terms of share in Europe we're flat year-over-year. In terms of share there, and we have converted some business in a few countries and we've lost some business in a few countries there, we haven't really been commenting specifically on regional market share numbers for a while now.

Now as you talk about Asia, we are seeing recovery in the high travel countries after SARS, but we still see the effects of a depressed Japanese travel marketplace and because we have disproportion share there through our joint venture partners, we have in excess of 70% of that marketplace, depresses our growth versus competitors in the Asian marketplace. But outside of Japan, we look pretty good from a share perspective through our joint venture with [Attacus].

I might just comment on Latin America, that is wholly owned, no joint ventures there. We gained share, that was primarily from the Galileo pull out over the last 12 months or so. Very good results there. I think 7 of the top 10 largest agencies or largest agency customers of Galileo were converted to Sabre. And we have completed most of the work as it relates to Galileo having pulled out of that market, most of the conversion, that is. And those customers are now on Sabre.

Great. That's helpful. Thank you.

Thank you very much, Ms. Henry. Representing Shimway Capital, we next go to the line of John Baylor, please go ahead.

Hi, this is Eddie Costiff for John Baylor. I had a couple of questions. One is on the STN business, could you tell us what percentage of the air bookings were DCA and kind of what the update is as to how that evolves throughout of the course of the year?

We now have more than 30 carriers signed up for the DCA 3 program and it represents about 45% of our bookings.

So would that be 45% in the first quarter and moving forward evolving to something like 50%?

What we've said is that we expect it to be about 50% for the full year.

Okay. And then could you guys just tell us in terms of what was the gross margin on overall business and the SG&A number?

We will break that out in our Q.

Okay. And capex?

Our guidance for the year on capex was unchanged in the quarter and it is 80 to $85 million.

Okay. Just the last question in terms of cost deferrals that you guys talked about when you preannounce upwards, just trying to understand, it sounds like some of that or a big chunk of that is incentives and how that evolves over the year? Does that also incorporate other things like technology and so forth and how should we see that evolving throughout the year? Just a little more detail if you could.

In terms of our performance versus our original plan it wasn't just incentives it was a number of other cost lines. It was TN revenue and it was strong performance in Travelocity. It was all of the above. And as I said, in general, our guidance on the expense side, including incentives is that we will spend back to our plan throughout the year. And that really is the case for a number of expense lines.

And to clarify, that number was plus 100 million for the year.

Yeah.

Okay. Thanks a lot guys. Good quarter.

Next, representing CIBC we go to the line of Paul Keung. Please go ahead.

Good morning. Just wondered if you could comment on what you think the consolidation [INAUDIBLE] would mean on the longer term on a business [INAUDIBLE], particularly referring to the [INAUDIBLE] merger?

And do you think the -- kind of going back the last couple years now to today to your probability of you having a larger stake or some ownership stake in a TMC is greater today than it was before because of what is happening in the business. Couple other questions after that.

Paul, I'll start with the last one first. And that is we certainly wouldn't comment on any M&A plans.

Going back to the first piece. I think the consolidation that is occurring certainly bodes well from a market share perspective, because we have the disproportionate share in the corporate marketplace and so as consolidation occurs we’d expect those bookings to fall with Sabre customers. Now, that will have some impact, obviously, on incentives as those grow. The larger customers, obviously, getting greater incentives and so there will be some impact there.

But we are also, as I’ve said before and said on the last call we're having good discussions with the largest travel agencies about the need for incentives to come down given the DCA 3 program.

Another question was on the GetThere Travelocity integration, just kind of give an update on where that is going and then can you tell what kind of roll out new features or maybe give me a feel of what it will be as they get their customer overtime as I start seeing this migration to more of a single platform.

Well, I'll comment on that to start and then I’ll let Michelle comment as well. We are continuing to invest in that product offering and the GetThere product offering itself, and will continue to do that. I think you will begin to see benefits as we merge some of the capabilities overtime. And it will take time to integrate the technologies that are available with Travelocity and also available with GetThere and we'll choose the best of both worlds as we go forward.

An example would be that we've just rolled out a great new hotel shopping path that Michelle talked about here a little bit earlier. There will be opportunities to take that very same type of technology and make it available in GetThere and we think that the consumer experience can be really helpful.

And then on the other hand, GetThere has great capabilities and great flexibility in terms of the policies that can be implemented on behalf of the corporation and we'll take that great technology and apply it as we go through our integration efforts .

So, I think you can continue to see a very strong GetThere platform on a stand alone basis going forward. You'll begin to see more of the technologies shared between Travelocity and GetThere. And I don’t know -- Anything else to add Michelle.

There has just been a host of really good examples, on line changes and refunds is another one where both platforms need it. So, working together has been very beneficial.

Travelocity business, in particular, as you know launched with a platform that was very heavy on the GetThere side. What we've been doing over the past couple of quarters is integrating Travelocity look and feel to Travelocity business while keeping all of the benefits of the GetThere policy capability. And that will role out later in the year.

Okay. And then the last one was on it’s site 59, that site have you migrated off the Worldspan? And if you haven't, and you [INDISCERNIBLE] I was just curious to what the decisions are when you determine the migration just given the feel of switching cost right now in this business.

[INDISCERNIBLE] Site 59 is still on the Worldspan platform. When we were a start-up company, we did a lot of coding work and development work, specifically with Worldspan. It is something we'll ultimately be looking at. It just hasn't been a priority given the strong revenue growth that Site 59 has seen and all the other priorities in our business . But there's really from just specific work we' had done with Worldspan in the early days.

Thanks.

Thank you very much sir.

Brent, this is Sam, we are out of time. I just wanted to thank everybody for joining us here this morning and we're looking forward to seeing you when we are out on the road. Thanks very much.

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