Sabre Corp (SABR) 2004 Q2 法說會逐字稿

Welcome to the Sabre Holdings second quarter 2004 earnings conference call. At this point all of your phone lines are muted or in a listen-only mode mode. However, later there will be opportunities for questions later and instructions will be given at that time. [Caller Instructions] As a reminder, today's conference is being recorded for replay purposes and that information will be announced at the conclusion of our call. Please note that today's conference is being recorded today the 22nd of July, 2004 as well as being broadcast live over the Internet. With that being said let's get right to today's agenda. Here with our opening remarks is Vice President for Investor Relations of Sabre Holding, Ms. Karen Fugate. Please go ahead ma'am.

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, CEO-Travelocity. Sam will review the 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'd like to remind all of you of some of our comments on matters such as our forecast of revenues, earnings, bookings, operating margins and cash flow, contracts or business and trend information would constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ materially from our expectations. Those factors are described in the risk factors section the Company's most recent form 10-Q filing with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliation of our adjusting items and non-GAAP financial measures in our earnings release and on our website. Now I'll turn it over to Sam.

Thank you, Karen and thank you all for joining us. We had another great quarter. We continued to execute on our plan and achieved strong financial results. e doubled our earnings, year-over-year, primarily due to increased travel demand, a dramatic improvement in Travelocity earnings and a companywide focus on cost management. Company revenue came in within the range we had projected, up 9% from a year ago. Keep in mind that the year ago quarter did not reflect the full impact on the DCA3 agreements on our travel network business. We achieved also achieve a major milestone. Travelocity delivered profitability for the quarter. Jeff Jackson will provide more detail on the quarterly financials in a few minutes. But first I'd like to cover some of the key highlights of the our businesses.

In Sabre Travel Network we've taken a number of actions to both strengthen our core GDS business with enhanced content and capabilities and to take advantage of the opportunities brought about by deregulation. We have been pursuing a number of opportunities in terms of high value new services that US deregulation will allow beginning in August. It's too early to talk specifics, but I'll say that some of our initiatives have been market tested while others are in the detail planning stages. For example, in the second quarter we conducted a test with two airlines using several marketing and retailing capabilities. Participating agencies shifted 4 to 10 points of share to these airlines in the 50 routes tested. This is an example of how we intend to change the discussion with carriers from one solely of cost to one of revenue and value creation as well. And it's indicative of the type of new travel merchandising opportunities we're also actively pursuing in hotels and packaging. We also rolled out several new features for our Jurni Network offering including new packaging capabilities from Travelocity's TotalTrip product, as well as a point-of-sale tool which incorporates inventory from Site59 for unbeatable last minute travel packages.

Looking at GetThere, strong continued growth in trips booked, more than 35% on a year-over-year basis. And, just a few weeks ago, we announced a comprehensive agreement with Carnival Cruise corporation providing all Sabre distribution points with full access to inventory pricing and booking functionality for all of their cruise lines. Under the agreement, Cunard, Costa Cruises and Seaborne Lines will now be available, enabling us to better capitalize on the significant growth expected in the cruise industry. And in May, we announced a five year GDS agreement with Expedia. Over the term of the agreement we expect to process a meaningful portion of Expedia's GDS bookings. We believe this deal demonstrates the value we can provide online agencies with our market-leading technology and services. I'll close the travel network section with an update on channel shift. The shift of GDS bookings to supplier-direct booking channels. We continue to see encouraging signs that channel history is slowing with the second quarter running below 2 points. You'll recall, that a year ago we were seeing channel shift running at about 5.5 points, and it was in the latter half of last year that it began to ramp down.

Moving to Travelocity. I mentioned earlier that we achieved a profitable quarter delivering earnings of almost $10 million on an adjusted basis and $1 million on a GAAP basis; well surpassing our plan. Travelocity has had a strong focus on growing revenue, taking actions to create a more favorable product mix and to expand their reach while also reducing costs. The work continues but we're in an excellent position today. We continue to see significant growth in packaging. Last month marks the one year anniversary of our TotalTrip packaging capability which continues on a strong growth curve. TotalTrip revenue in the second quarter grew 49% sequentially. Earlier in the quarter Travelocity Europe acquired plans to acquire Travel Channel.DE, a leading German online travel site. Travelocity's expansion in Europe is a high priority for us and with online travel growing more than 50% faster there than in the U.S., you'll be seeing more of this type of investment from us.

Looking at Sabre Airline Solutions, we saw strong volume for the reservations side of the business with excellent acceptance of our SabreSonic Passenger suite. Key contracts included a multi-year $10 million plus deal with Air One, Italy's second largest and fastest growing airline. And another contract with Aeroflot Russian Airlines provides not only the SabreSonic Suite, but also full access to the GDS system for Russian travel agencies. This is a good example of a cross-sell win with Sabre Airline Solutions and Sabre Travel Network. The software products and services side of the business signed a number of agreements including Jet Airways, Frontier Airlines and Air One. While we continue to be concerned about the longer sales cycle, airlines prefer to buy from us. We are winning contracts about 85% of the time. With that, let's go to Jeff Jackson for details on the financials. Jeff.

Thanks, Sam. I'll start my remarks with revenue performance for the second quarter. Total company revenue for the second quarter was 551million, growth of 9%. Earnings per share, excluding adjusting items was 47 cents compared to 23 cents in the year ago quarter. Earnings per share on a GAAP basis were 42 cents compared to five cents in the year ago quarter. And if you recall, in the second quarter last year we incurred a loss of $28 million in connection with the refinancing of our headquarters facility. Next I'll move on to revenue and operating metrics by business unit and I'll start with Travelocity's gross travel booked. Effective this quarter we began reporting gross travel booked on a book basis versus our previous practice of reporting it on a consumed basis. This reporting methodology is consistent with the peers and industry practice. We've also restated previous quarters to reflect this change. Therefore the first quarter, 2004 gross travel booked was--gross travel booked growth was 30% versus the previously communicated 28%. For the second quarter, gross travel booked was 1.3 billion, growth of 23%.

Now I'll move on to revenue. Travelocity had total revenue of 126 million, growth of 28%. Transaction revenue was 107 million, strong growth of 49% for the quarter. This marks the third quarter in a row where we've reached approximately 50% growth in this key performance indicator. Transaction revenue as a percent of gross travel booked for the quarter was 8.5%, up approximately 1 point from the first quarter. Non-transaction revenue, which includes advertising, corporate, and international joint ventures was 18 million for the quarter, a significant decline year-over-year primarily due to the loss of warrants from our former hotel supplier and continuing investment in Travelocity's internation joint ventures. Now let me discuss transaction revenue growth in greater dept. On the air side, transaction revenue grew 12%. While on the non-air side, transaction revenue grew 95% year-over-year. Taking our non-transaction one step further, packaging revenue grew 158% year-over-year and was up 20 points from last quarter. Packaging revenue as a percent of total transaction revenue was 23%. 4 points higher than last quarter and above the top end of our 15 to 20% expectation for year-end.

On the hotel side, total room nights across the entire Travelocity network were up 59% year-over-year. And lastly, 35% of total transaction revenue was merchant revenue, this compares to 30% in the first quarter.

Now I'll move on to Sabre Airline Solutions. Second quarter revenue from Airline Solutions was 61 million, growth of 7%. We saw strong growth from Passenger Solutions, our reservations hosting side of the business, as revenue grew more than 25% year-over-year. However this growth was dampened by a year-over-year decline in the products and services side of the business as we continued to see the customer sales cycle lengthen.

Finally on to the Sabre Travel Network Business. Sabre Travel Network had revenue in the quarter of 407 million, growth of 5%. Total global bookings processed in the quarter were 101 million. Representing year-over-year growth of 14% and direct bookings were 83 million, up 6 percent. Non-direct bookings, those from the joint venture partners, were 18 million, up 71% year-over-year; and this increase is primarily due to the anniversary effect of SARS on the Asia travel market. As anticipated we saw overall bookings growth rate decelerate in May and June as the anniversary effect of war and SARS began to ramp down. Breaking down total global bookings: US bookings grew 6%, international bookings ended the quarter up 23%, air bookings were up 14% for the quarter and non-air bookings were up 13%. Our world wide air-booking share in June year-to-date was 35.5%, up one point from a year ago quarter and remaining on track for our full year expectations.

Now I'll turn my remarks to expenses, operating income and margin for the quarter, and I'll start with expenses. On an adjusted basis, total company expenses declined year-over-year by 6.5 million and on a GAAP basis declined by 4.3 million. Primary drivers of this year-over-year decrease included favorable head count-related expenses, a positive variance in technology spend and related expenses and a decrease in professional fees post-deregulation. These positive variances were partially offset by the expected year-over-year growth in travel agency incentives. I'll talk more about expenses for the second half of the year in my outlook section.

Moving on to operating for the quarter, total company operating income, excluding adjusting items, was 105 million and the operating margin was a healthy 19%. Total company operating income on a GAAP basis was 88 million, resulting in a 16% operating margin.

Now let me cover operating income by business unit. Travelocity's operating income was better than expect with earnings of approximately 10 million and a margin of 8% on an adjusted basis; and 1 million on a GAAP basis with an 1% margin. Sabre Travel Network had adjusted operating income of 89 million reflecting a 22% margin. Operating income on a GAAP basis was 82 million with a 20% margin. And Sabre Airline Solutions had operating income of 6 million with an operating margin of 9%, 1 point higher than a year ago.

Now turning to other financial data for the quarter. Adjusted EBITDA was 122 million and GAAP net income was 59 million. Free cash flow for the quarter was 68 million and cash provided by operating activities was 237 million. This significant year-over-year increase is due to a variety of items including working capital changes as a result of Travelocity's greater participation in the merchant model. During the second quarter, we spent 35 million from the April, 2004 share repurchase authorization and repurchased 1.4 million shares. And finally during the quarter we renewed our 300 million revolving credit facility for a term of 5 years.

Before moving on to outlook, I would like to spend a few minutes on expense trends. For the full year we now expect total company expense growth of less than $50 million, or less than half of our original guidance of 100 million. On a GAAP basis, expense growth is expected to be less than 25 million. Most of this savings occurred in the first six months of the year. For example, Travelocity marketing expense will grow faster in the back half of the year than the first half of the year. Travel Network agency incentives were below our plan in the first quarter but, for the year, will grow at the same pace we communicated of about $50 million for the year. And salary-related data processing and a variety of other cost categories are expected to be below our plan throughout the year as our cross company cost cutting initiatives are taking hold.

Now, on to third quarter and full-year outlook. We expect full year EPS to be in the range of $1.40 to $1.50 versus the previous guidance of $1.30 to $1.35. And GAAP EPS is now in the range of $1.21 to $1.31 versus $1.09 to $1.14. For total company revenue we are revising our projection for the year and now expect to grow approximately 7 to 9%, on an adjusted basis, versus the previous projections of 5 to 10%. And on a GAAP basis, we project revenue growth of 5 to 7% versus previously of 3 to 7%. Due to strong booking-- direct bookings performance of 8% in the first half of the year, in contrast with our expectations of flat bookings growth in the back half of the year; we are increasing Sabre Travel Network full-year guidance to be between 2 and 3% growth on an adjusted basis and approximately 1% on GAAP basis. In Airline Solutions, we are lowering revenue projections to high single-digits due to the lengthening of the customer sale cycle on services side of the business.

Revenue growth projections for Travelocity remain unchanged, year-over-year growth of greater than 30%, on an adjusted basis; and greater than 27% on a GAAP basis. We are, however, increasing Travelocity's adjusted operating margin to 3 to 5%. On a GAAP basis, we expect full-year operating loss to be approximately 10 million to 15 million. Operating margin assumptions for Travel Network and Airline Solutions remain unchanged. We now expect full year EBITDA will be greater than 390 million and GAAP net income will be approximately 170 million. We also project full year free cash flow to be greater than 200 million and cash flow from operations to be greater than 370 million. For the third quarter we expect revenue to be in the range of 545 million to 565 million, or growth of 5 to 9% year-over-year, on an adjusted basis, or 4 to 7% on a GAAP basis. And we expect earnings per share on an adjusted basis to be in the range of 37 cents to 40 cents and EPS on a GAAP basis to be in the range of 31cent to 34 cents. Now I'll turn it over to Michelle.

Thank you, Jeff and good morning everyone. I'm pleased to be reporting on another strong quarter at Travelocity. I'll start with the high level themes and then take you behind the scenes a bit to let you in on what drove our performance in the quarter. Most importantly, the past quarter was another clear proof point of the turnaround in the core Travelocity business. The biggest news, obviously, is that we've restored our underlying economic model to one of sustainable health. That's why we're able to announce that Travelocity was profitable in the second quarter on both a GAAP and an adjusted basis; and is now profitable year-to-date on an adjusted basis as well. Our revenue growth and profitability for the quarter were the results of straightforward execution on the fundamentals. We saw robust growth in our highest margin merchant businesses, healthy levels of traffic and good transaction economics. This revenue growth combined with continuous focus on reducing expenses resulted in strong profitability for the quarter.

On the revenue side of the equation the story is, as it should be, simple. We grew our core operations in those areas where it makes most sense to grow, our profitable merchant and packaged line of businesses. Gross travel booked was up a strong 23% and, it should be noted, that had airlines increased pricing this quarter as much as they had during the second quarter of last year, year-over-year gross travel bookings would have been much more similar to the rate we saw in the first quarter. Transaction revenue, meaning revenues derived from our core business of selling travel products and services is really our most important revenue performance indicator. We continue to grow at a break neck clip in the second quarter coming in at just under 50% growth. In our critical non-air business we grew 95% in the quarter. Now, that makes three quarters in a row with transaction revenue growth at around 50% and with non-air growth 85% or higher.

This quarter the big drivers of our growth were in our merchant and packaged products. So let me just run through a few key numbers. Overall, hotel revenue was strong, driven largely by the expansion of our merchant model hotel program. Total room nights grew 59% for the quarter. We've been very encouraged see that our supplier-friendly approach in the merchant hotel space continues to pay off in the form of good availability and sustained merchant margins. We now have 13,000 properties in our merchant program and have expanded our destination management team significantly across the country to drive better availability and better pricing at the property level. We believe this is an investment that will pay dividends as we continue to expand the number of hotels with which we have a deep working relationship at the property level. In our packaging lines of business, TotalTrip and Site59 grew revenue at 158% year-over-year for the quarter and packaging continued to growth. Just last week we had seven record booking days in a row.

This quarter we expanded our travel extras program across product types and across markets, with direct relationships with several hundred vendors. We're selling ground transfers, lift tickets, entertainment events and cultural activities across a wide array of markets. All of this helps reinforce Travelocity is the place to go when you want a full travel experience. We also announced during the second quarter we've concluded an agreement with Hilton International to provide special merchant rates for our packaged offerings. This agreement adds to the thousands of hotels that already give us an incremental discount for our packaged products. On the cost side of the equation, the AOL and Fulfillment Operations deals we announced earlier in the year continue to drive savings to the bottom line. Additionally, we are applying stringent but reasoned discipline to our spending, while ensuring we do not put a drag on those activities that fuel our growth. We keep all of our operating costs under the microscope we continue to drive efficiencies there.

In terms of marketing dollars we stand by our view that investment in our brand is not negotiable and we're doing so carefully but aggressively. That said, we constantly look at the effectiveness of each immediate the channel we employ and continue to ensure that our plan drives the biggest bang out of our marketing dollars.

That covers some of the key financial metrics and performance indicators. I'd now like to walk through some of the initiatives that are key areas of focus for us. First let's start with our European strategy. In 2003 we focused primarily on domestic capabilities, Building a technology platform that would support our move into higher margin products, the merchandising know-how to shift our and a brand platform that would carry us through a period of intense growth in direct customer relationships. While we still had much growth ahead of us in the U.S., the foundational pillars are in place and we feel that now is the right time to turn additional management attention, development bandwidth and investment dollars to our international joint venture operations. We plan on investing more heavily and efficiently in the products, technology and marketing needed to grow in this key region. We plan to leverage our U.S. product platform into Europe beginning with our merchant hotel business which will launch in Europe in the third quarter.

We expect this to accelerate margin growth there and provide additional distribution for our hotel supplier partners. We also expect to get more aggressive on market and branding in Europe and we already have early data on our ability to do so. The UK operation has taken an assertive stance on building the Travelocity brand this year and the leading indicators like site visits and brand awareness are positive. Lastly on Europe, I want to emphasize, this is an area in which we will continue to be in investment. We won't break even in the near term, but as we push both operational synergies and higher margin products, we expect to see Europe become a significant part of our growth story.

I'll turn now to Travelocity Business, another area of focus on long term growth where we continue to register successes and gain traction. On the customer front, Travelocity Business continues to sign up new customers at a steady pace and secure more and more unique content through such deals as Best Western and Frontier Airlines. These agreements give our corporate customers yet another compelling reason to select Travelocity Business. On the July 14th Travelocity Business launched technology in it's customer center to develop, own and manage the technology used to automate the corporate travel reservation process from beginning to end. This implementation demonstrates how we are better equipped than other corporate agencies today to maintain low price points over time while continuing to offer outstanding customer service. Coming very soon Travelocity Business will also be launching significant enhancements to our online site. We think these enhancements will push us ahead even further ahead of traditional and corporate agencies.

The corporate sector is one in which we are confidently placing a long-term bet. We do not expect profitability in the near-term, but we think corporate travel is highly attractive in the long-term and ripe the introduction of efficiencies by automation and web-based services.

I'd now like to spend just a moment covering some of our newer and growing distribution channels for the products we manufacture. We made solid operational progress at World Choice Travel, the affiliate network we acquired late in 2003. Most notably, in the second quarter we integrated our TotalTrip and Last Minute Deals products into the WCT platform. WCT affiliates now have access to these high margin products and the adoption of our merchant hotel products has been strong. As Sam mention, we're also working across the Sabre Holdings portfolio to introduce high margin Travelocity products to offline agencies. While still in their infancy, we believe that these distribution opportunities across the Sabre portfolio are unique advantages for Travelocity.

To wrap up, I want to reiterate some of the major messages out of this quarter. First, we have done what we said we'd do. Starting two years ago we told you we'd transform our business and restore our underlying economic model to one of health and one of sustainability. While we still have much growth and improvement to execute, the foundations are here and our full quarter profitability, alongside strong top line growth is the best proof point we can offer. Second, we will not stop focusing on strategic investment for growth. Our stance in the European and corporate sectors, as well as the new distribution channels like WCT and offline agencies reflect this commitment to longer term growth. These past few quarters have been about showing you we have the people, the platforms and the products to execute against our plan, grow our revenue and maintain a healthy and profitable business. And going forward, we'll continue to balance execution on our core business with strategic investment in those areas that will drive even further growth. And now I'll turn it back to Sam.

Thanks Michelle. Before we go into Q&A, I'd like to recap a few points. I'll start by saying we're very pleased with the results of the quarter. We achieved significant earnings growth and much of that growth came from the profitability turn around at Travelocity, which improved operating earnings by more than $20 million on a year-to-year basis. Looking at the back half of the year, we expect significant earnings growth leading to full-year EPS growth of about 70% year-over-year on an adjusted basis and about 110% on a GAAP basis. Several positive factors are influencing our outlook. We expect Travelocity to continue to remain profitable and revenue to accelerate. We see our companywide cost initiatives coming to fruition, as well as other steps we took last year to drive more predicable revenue and expand earnings in 2004. That said we'll continue to make strategic investments to keep our businesses growing. Some will be in our own travel merchandising platforms, others will be in strategic acquisitions that round out our capabilities and broaden distribution.

We see opportunity for growth across our portfolio. We will make decisions with a longer term perspective focused on growth over the next 3 to 5 years. We are excited about the opportunities ahead. And with that let's go to Q&A.

Certainly. Ladies and gentlemen, as you just heard, if you do have any questions or comments we invite you to queue up at this point. [Caller Instructions] Representing Bear Stearns, our first question comes from the line of Jim Kissane. Please go ahead.

Thanks. First question for Michelle. Especially given Orbitz' announcement this morning or last night. Can you comment on the pricing environment in the merchant hotel arena and your relative competitive position.

We actually feel good about our pricing and we do thousands robots a day on all of our competitive sites and our pricing is very in line and, as I mentioned in my call script, we have not seen any erosion in merchant margins this quarter, this year, really since we launched the product at all. So, we're feel that our more supplier-friendly stance with hotels has been beneficial to us as we boast sustained, kind of, merchant margins and have terrific pricing and strong availability.

And you're confident in the intermediate term margin outlook.

Yes.

Okay. Sam or Jeff, can you kind of rank the factors causing the moderation in channel shift, you know, maybe--

Well, Jim, we what we've said in the past, and we continue to believe it based on the data that we look at, is that, in fact, more and more people are booking through the channels because they have access to the inventory and pricing. That came about as a result of the DCA 3 deals. Now the other piece of it is that, as you know, we've seen business travel and, obviously, the broader economy rebound. And that has meant we've seen a return of business travel bookings and more of those typically go through our channel than other channels. So we've seen the improvement in that channel shift indicator as a result of, I think, really those two things.

Do you think it's more DCA or more just a pick up in corporate--travel?

Well, it really is a mix of both.

Okay. Not to put you on the spot. But it sounds like in your comments that your appetite for acquisitions has gone up recently. Is that a safe assumption?

No, I would just simply say that we want to continue to invest, and I've explained or described my philosophy in the past that typically we'd like to make small and medium-types of acquisitions that will either broaden our content or broaden our distribution; provide capabilities that we might not otherwise have. So nothing's really changed in that. But we are quite focused on Europe and improving our position there through investments, and you've seen that in the types of acquisitions we've done there. And again, relatively small with Travel Channel.DE, relatively small late last year with World Choice Travel. So, you know, those are the types of things that we like to do. I don't think that--I think you'll see us acting consistently.

Okay. Thanks, Sam.

Thank you very much, Mr. Kissane. Next we go to the line of Greg Gould with Goldman Sachs.

Hi. This is Angelo for Greg Gould. I was just curious, in terms of Airline Solutions, how is the outsourcing contract going with --

Which outsourcing contract? I'm sorry.

Isn't there one going on--you have one with Airline Solutions where EDS provides some type of outsourcing service.

Ah, yes, in fact EDS provides a lot of our data processing services and that relationship is good, solid, good relationship with the EDS team.

Thank you.

Thank you very much Mr. Gould. And next representing Morgan Stanley, we go to the line of April Henry. Please go ahead, ma'am.

HI. I was hoping Michelle could give a little more elaboration on the comment about the airlines in the quarter and had they, I guess, performed differently you would have seen 1Q growth. Can you be more specific about what the drive of that was?

Absolutely, April. Last year from second quarter to first quarter airlines raised prices significantly as they saw post the war. And if you look at it this year, second quarter there are lots of fare sales so there wasn't that same kind of increase from first quarter to second quarter in airline pricing. Gross travel booked of course is a reflection of volume times price and if you actually normalize for that, having said that, our revenue is derived off the price of an airline ticket. If you normalize for that, you would have seen much more similar gross travel booked--gross numbers that we registered in the first quarter.

Okay. Thank you.

Sure.

And thank you, Ms. Henry. Next we go to Brian Egger representing Harris Nesbitt. Please go ahead.

Yes, good morning. Just a follow up question about your 59% increase in room night sales for your merchant hotel business. And related to Orbitz' comments last night, I know they had some display management challenges that affected their ability to put out competitively priced hotel inventory. I'm just wondering to what degree you felt you might have benefited in terms of your room night sales from some of the disruptions they had in their ability to offer either a competitively priced inventory-- I know they had some system and software glitches as well.

Sure Brian. First of all, we feel great about our results especially when you look at what results we've seen from Orbitz come out last night. So, first and foremost. Secondly, you know I also feel terrific about the operational decisions we made. It was a risk, as you know, two years ago when we undertook building out a merchant hotel model to do it differently, to leverage Sabre, to build into hoteliers directly and not just to rely on the standard extra net fax environment. That risk paid off well. We built terrific technology. We worked very closely with hoteliers. And, frankly, having Sabre as a parent company allowed us to do some really interesting strong things with hoteliers and connectivity and passing information for payment. That I think is really paying off and I'm certainly glad we decided to shake up the industry a little bit and do things differently. I don't think that our room night growth is reflective of any system issues that Orbitz had. I think it's reflective of strong execution on a different but better operational model.

Okay. Thank you.

And thank you, Mr. Egger. Next in queue is Tom Underwood with Legg Mason. Please go ahead.

Yes. First I was wondering if you could give us any quantification of the size of your current European business for Travelocity, even in terms of either gross bookings, revenue or anything else?

Tom, we haven't broken that out, as you know, we treat it currently as--the losses as a contra-revenue. We haven't broke out the gross booking or revenue out. Suffice it to say though, we will be getting much more focused in investing in what Europe needs to be successful. Now that we feel we have better management bandwidth to roll products and capability out with our joint venture partner in Europe.

Okay. And then could you just offer us some guidance on what the current environment is looking like for gross booking growth. I mean, one thing Sam mentioned was the growth in business travel and the benefits that that brings to the GDS presumably through corporate travel agencies having good year-over-year numbers. I'm wondering if that makes it more difficult for gross bookings at Travelocity, especially major city, hotel bookings when we get into the fall.

There's I think a few questions there Tom. We're not going to comment on what are, you know, guidance going forward is on gross travel booked because that's-- as I mentioned it's so reflective of how airlines decide to price and a whole bunch of other things, as well as ADR. What I will say, I think there's a second part of your question which is, is availability drying up in major hotel markets, or maybe the flipside, is ADR increasing in major city markets? And we have not seen a change in availability. I will say we don't have years of experience in the merchant hotel business so we're watching it closely. Certainly we're seeing ADR improvements like everybody is and we feel good about that, but we're not seeing any problems with availability at this point.

And we obviously don't have as much good year-over-year comparison data to look at this year versus last year; obviously because we were newer in the business at that point. But we're watching it closely and so far, so good.

Okay. Great and finally, I guess you launched the new Travelocity site back on March 26th. So with some history with it now, what was the change in conversion with the new site.

We don't talk about conversion as you know. And again, we haven't seen what all our competitors. We're certainly pleased to see our results versus Orbitz. But we did it not just to try to increase temporary conversion but really to start differentiating ourselves over time. I said that was going to be step one. It is step one and you'll continue to see places where we differentiate continuing going forward. But we're really pleased about and we're pleased with consumer feedback.

Great. Thanks.

Our next question comes from the line of Michael Millman with Newman Research Associates.

Thank you. You mentioned that you expect to pick up, I guess in Travelocity, pick up your marketing spend in the second half. I guess a couple things about that. Is that because of what you're seeing competition doing? To what extent is some of that price as well as volume? And isn't it typically that you do most of your--or more of your promotion in the first half to build for the summer?

Sure. A lot of questions there, Michael. First of all I think we feel good about the Gnome campaign, first and foremost, which is always the driver of thinking about much we want to spend. Do we have a campaign that we think is working, do we have a website and a set of capabilities that we think are better than our competitors? So, certainly, as we look at that we're feeling good going into the second half of the year and we're looking for opportunities where we think we can increase marketing spend that will result, of course, in greater transaction revenue growth and operating income growth. We also have significantly improved, as I think you all know, our capabilities with respect to search, our landing pages, our fees with search engines; and so that gives us optimism that we can spend more profitably in that channel as well.

While it is typical that you see first half being significant with ways to even coming out of the holidays, you know we certainly-- the benefit of being online is that you can think about it very tactically with respect to different channels and change your mix over the course of the year depending on how you're doing. So we think their are opportunities to spend money smartly in both the online and offline arena.

Could you talk a little bit about what you're seeing in pricing for marketing as opposed to--

Sure. So pricing I think you're probably talking mostly about the online channel since there's always so much discussion and debate. And we are very, very careful about--in search, in particular, how we bid, where we bid, we employ some pretty sophisticated tools and capabilities to figure out what are the right words, how should we think about lookback windows. As we moved more and more of our higher margin products to a higher margin mix. That gives us greater opportunity to spend profitably and, of course, as we've improved our landing pages that makes more sense. It's really impossible to comment specifically on what is pricing looking like in search because, as you know, it's 10s of thousands of keywords that are changing hundreds of times a day on pricing. We have certainly felt that our ability to spend profitably has increased over time not decreased.

Thank you.

Thank you very much sir. Next in queue is Paul Keung with CIBC. Please go ahead.

Yes, most questions are asked. I guess a follow-up to that question is what--are you seeing a shift in your spending trends off and online in Travelocity now that you ramped up the merchant business so well? Second question is do you see any opportunities of strengthening hotel relationships by taking on inventory risk or is there any change in thoughts in terms of the the opaque business over the long term?

Sure Paul. I've never heard you say I think all questions have been asked before. But with respect to online and offline we don't break out specifics, we do think that. as I mentioned, that our ability to spend profitably in the online has grown over time not decreased. With respect to inventory risk, it's not something we think we need to be doing. We look at it all the time to see do we think there are interesting models? Certainly we have much more sophisticated ability to understand what we can move by market now than we did last year, but it's not something in the near term that, I think, will make sense for us.

Okay, and then one question for Sam, on the Expedia contract that you recently signed. When and how many bookings should we expect and is there an investment component to it as you take on that relationship?

Well, first of all we haven't commented in detail on that relationship and that's by mutual agreement with the folks at Expedia. So we've talked about the fact that it's a five year deal. We've talked about the fact that they are in development. We are working closely with them as they build their connection into Sabre and that we expect that, over the course of the back half of the year, that work will be completed and we'll begin to see bookings flow through. But we haven't reported or commented on any specifics associated with volumes.

I can simply add we remain on track with what Sam just said there.

Right. Things continue as planned.

Okay.

And did you have any follow-ups, Mr. Keung?

Nope.

Okay, very good sir. Thank you. Next we go to Lehman Brothers', Jeff Kessler. Please go ahead.

Thank you. Do you have any comment on what you are doing specifically or what you may be seeing the industry doing in terms of discussions with the travel agencies with some people call incentives, some people call inducements? Are you offering anything to the travel agencies in return for getting better deals on those incentives?

Well, we have--you may be aware we rolled out, earlier this year, our Assured Vantage Program and it was focused on the small and medium agencies. And the intent there was to offer up a number of benefits to agencies in the terms of the contract and some of the services that we offered up, in return for improvements in incentives-- improvements for us from an incentive perspective. That program has continued on at a very healthy pace. We see renewals in the sector of the business continuing as they had before we introduced the program.

So we've had good progress there in terms of our incentive lines as we engage with those agencies in the small and medium market. We continue to have discussions with larger agencies about incentives and in fact you may have seen that in Canada we engaged in a relationship with Air Canada whereby we asked the travel agents who wanted access to that content to provide improvements in our incentive line in return for getting access to the content; and, in fact, we've been quite successful there as well with probably somewhere in the neighborhood of over 50% of the bookings in that part of the world opting into our program at lower incentives. So we have a number of programs underway, they've been working quite well so far but we continue to have, you know, we will continue to work it and work it aggressively.

In line with that, we perhaps saw some of-- some of the cost advantages that you had in the first quarter being affected by some incentive programs being pushed out a little bit. Can you comment on this? Are we seeing this being pushed out further some of the costs that you have with agencies on incentives being pushed out into the second half of the year?

Jeff, I would say that as we've said we're below our internal forecast for incentive growth in the first quarter and a little bit, you know, roughly in the second quarter. But the major theme here is it continues to grow as we had forecast. You know, and the incentives-- we make assumptions about conversions a number of things, so lots of times during the course of the year, we will have quarter to quarter swings on when it's--an incentive actually hit the P&L. So it's really nothing more than that from a longer term perspective. It continues to be a lower growth rate than the prior year so it's, overall, a good story. And along with all those other cost items I said, the cost performance of this company in the first half of the year and, frankly, what we think for the full year is really tremendous.

Thank you.

And thank you, Mr. Kessler. [Caller Instructions] We do have a follow up question. Let's go back to April Henry now, once again, with Morgan Stanley.

Couple of questions on the bookings metrics. First of all the direct versus non-direct bookings number changed pretty significantly. I'm assuming that has to do with the growth international and JV. Wondering what trend line, we should expect that trend line to look like in terms of non-direct bookings percentage? Then also, if you can give us an update on what the DCA bookings percentage is at?

April, your observation is correct that the gap is really--think about that as an anniversary of the SARS impact in Asia and so we had tremendous growth on a year-over-year basis in our total global bookings processed. And you know, we don't, we're not providing trend lines there. I would imagine that you'd see less of that anniversary effect in the third and fourth quarter simply because it was so dramatic in the second quarter a year ago for our Asia business. And your second question, can you repeat it again? Yeah--no, DCA 3, thank you. We are just on trend with our forecast that we issued in the beginning of the year of about 50% of our total bookings being under DCA 3 contracts.

By year end or at this point?

At this point.

Okay. Thank you.

We also have a follow up question from Tom Underwood, once again, with Legg Mason. Please go ahead sir.

Yes, I was wondering if you could comment on the portal arrangements, AOL and Yahoo!? Were they both profitable in the quarter? I noticed that Yahoo!, actually, was running some advertisements for Yahoo! travel. I was wondering how gross booking trends looked for the relationships?

So, AOL and Yahoo!, as you know, last year declined significantly year-over-year in both transactions, visitors, all the key metrics; and the good news is that with a lot of focus at the end of last year both of those have returned to revenue growth year-over-year. Now, it's not growing as fast as Travelocity.com but the operational relationships with both parties has improved-- the kind of day-to-day relationships with both parties has improved and we've been much more focused with both parties on creative ways to drive revenue growth at Yahoo! Travel and AOL Travel. So I'm pleased with the results there. Again, not growing as fast as Travelocity, but back on a growth trajectory, which is a good thing.

Are they profitable?

We don't comment on profitability. It's hard, Tom, to think about, you know, do you look at it on a variable basis, do you look at a fully loaded basis? With or without them, so it is hard to break it out. Would we contact less with hotels with or without them? So it's hard to kind of break that out. We look at it in terms of how we feel about their revenue growth versus their potential. We still think there's a lot of potential out there but we're pleased that they're growing again as opposed to declining.

Great. Thanks.

And thank you Mr. Underwood. We have a follow up from Jim Kissane. Please go ahead sir.

Michelle, can you quantify the investments in Europe and Business? I'm trying to get a sense of what the underlying core margins would be in Travelocity. Then just to follow up on that what your target is for turning those businesses profitable?

Sure. We haven't released specific around what our investment in both of those markets is, nor have we released specifics around when we project break even in either of those kind of channels. We certainly, at the time at which we feel it's the right time to release that information we will, I would just say we're getting, you know, with Europe, in particular,-- There's just a lot of things we can do to help our joint venture be more successful. Rolling out merchant hotels which will come in the third quarter, working with them on things like fraud and chargeback and operational synergies that we're seeing here on our own side. Those are the kind of things that we want to get much more aggressive in doing and we think that long-term there's a lot of benefit there. Of course, we certainly feel that with robust trends growth of 50% or greater than what we're seeing here in the US in the online marketplace, it certainly makes sense for us to thinking about marketing well. Europe, as you know, is the world's largest leisure market and it's one that we're excited about the opportunity to invest further in.

Okay, thanks Michelle.

And thank you sir. With that Mr.Gilliland and our host panel, I'll turn the call back to you. There are no further questions.

Thank you. We'd like to end the call. Thank you very much.

Thanks everybody.

Thank you.

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