Sabre Corp (SABR) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and good morning. Welcome to the Sabre Holdings Fourth Quarter and Full Year 2004 Earnings Conference Call. At this point your phone lines are in a listen only mode.

However, later during the call, there will be opportunities for your questions. And those instructions will be given at that time. Just as a note, if you should require any assistance during the release, you may reach an AT&T operator by pressing "star" then "zero" on your phone keypad.

As a reminder today's call is being recorded. And with that being said, let's get right to this quarter and full year results.

Here with our opening remarks is Sabre Incorporated's Vice President of Investor Relations, Ms. Karen Fugate. Please go ahead, madam.

Operator, thank you. Hello everyone and thank you for joining us today. I am here with Sam Gilliland, our CEO; Jeff Jackson, our Chief Financial Officer; and Michelle Peluso, our CEO, Travelocity. Sam will review highlights for the quarter and the full year. Jeff will review our results in more detail, and Michelle will provide an update on Travelocity.

But before we get started, I'd like to remind all of you that some of our comments on matters such as our forecasted 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-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 press release and on our website.

Now with that, I will turn the call over to Sam.

Thank you, Karen, and good morning, everyone. I am pleased to say that we successfully executed on the plan we laid out at the beginning of 2004. This morning we announced full year net earnings of 203 million on an adjusted basis and GAAP earnings of 190 million, up 70% and 129% respectively. The results of a dramatic swing in profitability for Travelocity, return of travel demand and strong cost management throughout the company.

We also met our revenue target for the year. Our financial accomplishments were many but that's only part of the story. We also made advances in our strategic objectives to maximize the performance of our businesses. Accelerate travel, retailing and reduce cost for competitive advantage.

Let's take a look at how that played out in our individual businesses, starting with Travelocity. The Travelocity team met its key financial and operating goals for the year. We expanded our presence outside the US with acquisitions, including the buy-in of our Travelocity Europe joint venture. We made significant advances in building supply relationships, expanding our merchant program, growing our packaging business, and delivering best in class capabilities such as Flight Navigator. Michelle will talk more about Travelocity in a few minutes.

Looking at Travel Network, our distribution business consistently achieved its revenue and earnings growth targets throughout the year. We expanded our distribution and marketing services for hoteliers with the acquisition of SynXis Corporation and the launch of hotel Spotlight. We rolled out a number of merchandising initiatives through the GDS with results including some impressive gains for specific hotel properties and very encouraging early stats on our last minute deals, including increases in both the unit volume of packages sold and the number of agents actively selling our packages.

We successfully established Jurni Network, our leisure agency consortium and have seen some very positive early results. Channel shift remained at low levels, averaging under 2 points for the year. Looking at our get there activity, we increased trips more than 30% year over year, signed and renewed customers representing over 2.8 billion in annual air travel spend, and rolled out new technologies including the industry's first fully automated online ticket exchange.

Moving on to Airlines Solutions, as you know, we had a really tough year on our software products and services business with the financial pressures in the airline industry, but I am pleased to say that in the fourth quarter we saw revenue rebound nicely. In fact, we had our best quarter for the software group and for Airline Solutions overall since the group was formed after El Al transaction in July 2001.

The reservation side of the business also had a good quarter and a very good year with strong acceptance of our SabreSonic suite of products. Major customer agreements included Aeroflot, Air One and Frontier Airlines. Those were just a few of the business highlights. Across the company all of our businesses contributed to significant cost management over the year. We eliminated costs across the portfolio well in excess of $80 million. We also continued to enhance shareholder return through both dividends and stock repurchases. Earlier this week, we announced an increase of 20% to the quarterly cash dividend, bringing it to 9 cents a share.

So, 2004 was all about executing on our plan and you can expect to see more of the same operating discipline from us in 2005. You will also see us taking action this year that should bring us distinct competitive advantage. It will transform us into a true travel retailer to ensure that we have the world's leading travel marketing system.

In our outlook call in December, we outlined our strategy for extending Sabre Holdings from reseller to retailer. Our strategy is based on two key elements to continue to optimize the core distribution business for scale and efficiency, while aggressively expanding our position in the higher margin retail business. In support of this transformation, we are focused on four strategic objectives for 2005. First, to grow our retail revenue across our network worldwide, online and offline. We will be focusing on hotels and packages where the opportunities are greatest for our customers and our shareholders.

Next, expansion in Asia and Europe. We intend to grow our presence in these large and growing market segments certainly as reflected by our recent actions with Travelocity. Third, we will continue to leverage the scale and efficiency of the distribution business to maintain a leading cost position. And finally, we will focus on delivering leading scale technology to better serve our customers. We will continue to invest in leading open systems technology as a mean for further innovation and differentiation of our businesses.

In 2005, we will continue to grow organically. We will also continue to be opportunistic, thoughtful, disciplined in our M&A activities, and we will continue to return capital to our shareholders. We expect to enter 2006 well positioned for significant growth.

And with that, let's go to Jeff for details on the fourth quarter and full year financials.

Thanks Sam. Operating excellence across all of our businesses drove 2004 financial performance. We exceeded total company financial targets laid out in the beginning of the year, which resulted in meaningful revenue and earnings growth. We ended the year with total company revenue of 2.1 billion, an increase of 7% on an adjusted basis and 4% on a GAAP basis.

Total company operating income and margin for the year on an adjusted basis was 316 million, a 15% margin, and on a GAAP basis, operation incomes 259 million, a 12% margin. Contributors to the strong results include Travelocity's turnaround to profitability and company-wide cost reductions of over $80 million.

Earnings per share excluding adjusting items was $1.47, growth of 77%. And on GAAP basis earnings per share were $1.38 over 100% growth year over year. For the year, we generated strong cash flows, with EBITDA of 386 million and GAAP net income of 190 million. Our free cash flow was 231 million and cash flow from operations was 363 million.

In addition, we ended the year with cash and marketable securities balance of 837 million. This is after returning approximately 270 million to our shareholders. 41 million in the form of dividend and 228 million from the repurchases of approximately 10 million shares of our stock, reducing our share count by approximately 7%. We ended the year with debt of 601 million.

Now moving on to total company results for the fourth quarter, total revenue was 496 million, up 6% from a year ago quarter. Operating income on an adjusted basis was 39 million and on a GAAP basis was 24 million. Earnings per share excluding adjusting items were 22 cents compared to a penny in 2003. This includes an approximate $5 million positive impact due to a reversal of a certain accrued income taxes. But even excluding this reversal, earnings per share would have been well within our expectations. On a GAAP basis, earnings per share were 16 cents compared to a loss of 10 cents in a year ago quarter.

Now moving on to business unit performance for the fourth quarter and the full year. I will start with Sabre Travel Network for the fourth quarter. Revenue was 347 million, flat over the same period last year. Operating income for the quarter on an adjusted basis was 37 million, growth of over 80%, and on a GAAP basis was 33 million, growth of over 100%.

For the full-year revenue was 1.6 billion, an increase of 2% on an adjusted basis and flat on a GAAP basis. Adjusted operating income grew 25% to 289 million with a 19% operating margin. On a GAAP basis, operating income grew 6% to 270 million for a 17% operating margin.

Total global bookings process in the quarter were 87 million, an increase of 1.2%, and for the full year were 391 million, an increase of 7%. Direct bookings in the quarter at 71 million, growth of 2%, and for the year, 323 million for growth of 4.5%. This year-over-year booking's growth is attributable to the recovery in the travel industry, the slowing of channel shift and share gain of approximately 1 point since the prior year.

Moving to Sabre Airline Solutions fourth quarter results. Revenue was 63 million, an increase of 6%. Adjusted operating income was 8 million, and GAAP operating income was 6 million. Airlines Solutions produced its strongest revenue and earnings quarter ever. This positions us very well to achieve the financial targets we laid out for 2005.

Turning to full year results for Airlines Solutions, revenue was 243 million, growth of 5% and adjusted operating income was 60 million, a margin of approximately 7%. GAAP operating income was 14 million, a margin of 6%.

Now for Travelocity fourth quarter results. Total revenue in the fourth quarter was 126 million, growth of 30%. Total transaction revenue was 105 million, growth of 38%. Breaking down transaction revenue further, air transaction revenue grew 7% while non-air transaction revenue grew 66%. Packaging revenue for the quarter improved 90% year-over-year. Non-transaction revenue for Travelocity was 21 million, an increase of 1%. Travelocity had an operating loss of 5 million on an adjusted basis for the quarter, primarily due to incremental losses incurred from the European acquisition on top of the seasonally weak quarter. Excluding the European business, operating margin for the quarter would have been positive. The operating loss on a GAAP basis was 11 million.

Now for total year results for Travelocity. Gross travel booked for the year was approximately 5 billion, representing 21% growth from 2003. Full-year revenue was 503 million, growth of 30% on an adjusted basis and 27% on a GAAP basis. Breaking down revenue further, transaction revenue was 428 million, a growth of over 46% while non-transaction revenue was 75 million, a decline of 21%. Now I'd like to discuss transaction revenue in a bit more detail.

On the air side, transaction revenue grew 11% for the full year while our non-air transaction revenue grew 85%. Other important non air revenue metrics include packaging revenue, which grew 118% for the year. By yearend, packaging revenue represented 24% of total transaction revenue. This is double what it was two years ago. And total room nights, which across the entire Travelocity network were up 53% over 2003.

And lastly merchant revenue accounted for 38% of total transaction revenue, more than 10 points higher than the prior year. Travelocity operating income on an adjusted basis for the year was 13 million, a margin of approximately 3%. On a GAAP basis, Travelocity had an operating loss of 20 million, which represents an $80 million improvement over the prior year.

Now I'd like to turn my remarks to our outlook for 2005. As I told you in December, we expect to make incremental investments during 2005 of approximately 30 million in areas such as international expansion in Travelocity, merchandising initiatives, and emerging businesses. These investments provide critical capabilities for significant growth in 2006 and beyond. Nevertheless, we expect total Company revenue growth to approach 10% and earnings per share to be in the range of $1.50 to $1.60 on an adjusted basis, and $1.41 to $1.51 on a GAAP basis. This represents EPS growth of 2% to 9% on a GAAP -- on an adjusted basis. This EPS range does not reflect any impact from the expensing of stock options pursuant to FAS 123.

As a reminder, in our December outlook call, we gave business unit expectations as follows. Sabre Travel Network revenue growth in low single digits with an operating margin in the mid teens. Travelocity revenue will grow 25 to 30% year-over-year and operating earnings growth is expected to be in excess of 100% year-over-year with the mid single-digit operating margin.

And finally, Airlines Solutions revenue will grow approximately 10% with a very healthy operating margin in the mid-teens. We expect full year adjusted EBITDA will be approximately 400 million and GAAP net income will be approximately 190 million. For 2005 we expect free cash flow to be approximately 200 million, calculated as cash flow from operations minus capital expenditures. And please note this is a change in how we previously calculated free cash flow. We believe this new calculation will better reflect changes in our working capital balances. Cash flow from operation will be approximately 300 million.

Before I get to first quarter outlook, I want to spend a few minutes on the change in the way we account for Travelocity advertising and marketing expense within the fiscal year. Currently, advertising expenses spread throughout the year based on forecasted quarterly transaction revenue.

Starting in 2005, we will change that and we'll begin to recognize advertising expense throughout the year simply when it's incurred. This change will result in an approximate $6 million shift of advertising expense to the first quarter with a corresponding decrease over the third and fourth quarters. There will be no impact to Travelocity's full year results, which I will remind you we expect to double our operating margin.

Now having said that, let's move on to the outlook for the quarter. For the first quarter, we expect revenue to be 560 million to 580 million. We expect earnings per share, excluding adjusted items to be in a range of 27 cents to 32 cents, and on a GAAP basis to be in a range of 24 cents to 29 cents. Keep in mind these estimates include the addition of approximately 50 million from the accounting change in Travelocity's operating expenses, as well as incremental losses from the European acquisition.

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

Thank you, Jeff. When I spoke to you a year ago Travelocity was at an inflection point. We were coming out of the critical period of investment. Our key indicators were removing in the right direction but we still had to prove our ability to execute a real turnaround in the business. Our competitors were moving swiftly and aggressively, both domestically and abroad.

At this crucial point in Travelocity's history and in response to it, we outlined an aggressive set of goals and milestones a year ago. I told you that in 2004 Travelocity would reap the benefit of the investments we've made in our core platform, investments that would put us on a growth trajectory with healthy and sustainable transaction economics and with a brand that stood for something different in travel.

Well, the data is in. 2004 was truly the turnaround year for this business. We are profitable. We are growing, and we've not only closed the product gap with our competitors but we've surpassed them in a number of areas. Most importantly, we have reoriented ourselves from being in defensive mode to an offensive stance in those areas where we have or can create competitive advantage.

I want to walk you through the detail of the goals we laid out a year ago and the true points in our successful execution against them. First and most importantly, I told you that Travelocity would be profitable for the full year 2004 on an adjusted basis. And as Jeff reported, we've registered a full year adjusted operating income of nearly $30 million with a GAAP operating loss of $20 million. This is more than a $65 million turnaround in our operating income year-over-year even with our investments in Europe.

In the fourth quarter, excluding Europe, Travelocity had a positive operating margin. Second, I told you that revenue would increase by 30% year-over-year. Full-year transaction revenue growth came in at 46.5% and total adjusted revenue growth was 30% while revenue growth on a GAAP basis was 27%.

Now just to put that in perspective, in 2002, revenue growth was approximately 4% and in 2003, revenue growth was just over 14%. We are very pleased that we have accelerated our revenue growth significantly in 2004. A year ago we also said we would continue the rapid growth of our merchant businesses and that they would account for an increasing proportion of our total revenues.

Merchant revenue accounted for 38% of our total transaction revenue for the year up more than 10 points over last year. I said that we would exit 2004 with merchant hotels accounting for over 65% of our total room nights excluding World Choice Travel. While we will no longer be reporting our merchant hotel mix, I will say that we exceeded this goal and total room nights grew a robust 53% for the year and 31% for the fourth quarter.

Fifth, I committed, the packaging revenue would account for 15 to 20% of total transaction revenue for the full year 2004. Again, here, we well exceeded our goal. For the full year 2004, packaging revenue accounted for 22% of transaction revenue and for the fourth quarter that number was 24%. While we experienced robust growth in our merchant products, we also committed to investing in our non-merchant products, particularly Air, to keep them relevant and best in class.

Our key true point here is the development of Monster Flight Navigator, our industry leading air-shopping product. In our new Air pass, we deliver features like number of seats left, where we alert customers that there are a three or fewer seats available at the quarter price. Alternate date and alternate airport air searches with some of the lowest prices for flexible customers, and seat maps, which are available before you book a flight.

The transaction economics of stand-alone flights are not a secret to anyone; they continue to be a large traffic draw to our site and a key consumer barometer for price competitiveness. So we must be and are industry leaders. A year ago I also said we would invest in, differentiate, and rejuvenate our consumer brand. Over the course of the year we went to market with a roaming name campaign, dramatically improved our Web site, developed a new logo, and we launched our brand.

In support of the new brand logo and brand spokesperson, we ramped our customer acquisition spend in 2004. We also delivered a ground presence in Las Vegas. Activities and things like movie and music value adds, all of which help ensure our consumers know the best trip starts with Travelocity. Investing in our brand was a crucial decision then and even more so now as our industry remains competitive with new entrants who focus almost entirely on price.

We've been very proud of the emotional connection we started to build with our consumers as a result of all of our significant improvements in building a brand that stands for great travel experiences. And it's showing up in our brand metrics. Brand selling is up 17% from December 2003 in our brand surveys. This means Travelocity has regained momentum, as the company consumers believe is the leading player in the industry.

Additionally, we said that a sizable component of our long-term growth would come from new distribution channels. Over the course of 2004, we took some bold steps and gained traction in all three new distribution channels. Corporate, international, and the Travelocity partner Network. In the corporate marketplace, Travelocity business continued to see momentum launching a rebound user interface and bringing on over 250 accounts in the fourth quarter alone.

2004 saw the acquisition of blue chip travel accounts such as Aetna, General Dynamics, and the American Medical Association. All of this means 2005 is off to a good start in our corporate arena. Internationally we strengthened our position. In Europe, we bought the non-German assets of our joint venture and have begun the injection of management talent and investment resources.

We also entered into the French online marketplace to the launch of our adhesive brand and expanded our presence in Germany with the acquisition of Travelchannel.de. We're very pleased with this sizeable growth we're seeing in Europe so far in 2005. In Asia, we recently announced that we had entered into a contract, which may result in Travelocity having complete ownership of Zuji in 2006.

Lastly the Travelocity partner, Network, signed and launched three major partners in 2004, American Express, AARP, and Southwest Airlines cruises. And at the same time we reversed the trend of decline with our partners AOL and Yahoo and we returned both relationships to productive partnerships. But we also knew we needed to focus on taking costs out. We've achieved this through significant reductions in our service and some more costs and renegotiation of our AOL agreement, in addition to many other smaller cost reductions.

Lastly, I vow to you that we would remain true to our supplier friendly model. It is in our DNA and it makes good business sense. When we started in merchant hotels, some said we were five years behind but we said we would use that as an opportunity to learn and builds something better for hotels and consumers as a result. Now just two years later, we're hearing from many hoteliers that we are several years ahead of our competitors in terms of the product and the relationships we have built.

In 2004 we saw a very powerful proof point. Inter-Continental hotel group announced Travelocity was approved as a certified vendor. Several of our competitors who stand on supplier relations could not be more different than ours; we are not certified. In energizing to the team, we see our approach pay off and to see our competitors attempting to imitate our lead.

2004 has certainly been a great year for us. But we're very well aware there's so much to be done. For us, 2005 will be about focusing on the kind of we are and want to be. Certainly, we have the foundations, healthy economics, strong supplier relationships, and an expanding global footprint. 2005 will be about continuing to define who we are in the eyes of our customers and what our brand means. Every touch point will be imbued with our mission to be the premier customer advocate and champion. Best prices, yes, the customer champion above all.

We want to deliver on the promise that the best trip start here. We will support our leisure and corporate travelers throughout their travel experience. Over the coming months, you'll see us continue to differentiate ourselves in our quest to be the most powerful brand in travel. And with that, I will turn it back to Sam.

Thanks Michelle. Before we head into the Q&A portion of our call, I would like to briefly sum up a few key points. 2004 was a very successful year. We executed on our plan and we laid the groundwork for a path forward. In 2005, we will keep our focus on superior execution even as we turn up the dial on developing our growth opportunities. In the months ahead, you can expect to hear more about the work we're doing to optimize, leverage and grow the pipes in our business.

Our technology including but not limited to the world of best TDS gives us a unique opportunity to increase the value we bring to the market. So that will be an area of emphasis for us. The improvements we make there will help us expand even more quickly into the higher margin retailing space. We will not only be sharpening our focus on the retail products we have to offer but will be working to transform the end-delivery mechanism or points of sale too. With that one to punch, we expect to enter 2006 well positioned for significant growth. Now you can ask your questions.

Indeed, thank you. And ladies and gentlemen, if you do have any questions or comments, please feel free 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 just as a not, you may remove yourself from the queue by pressing the "pound" key. So once again to ask a question, please press "star" "one" on your touchtone phone.

And first is queue is Jim Kissane with Bear Stearns. Please go ahead.

Jim.

Can we get your perspective on the GDS alternatives?

Sure. I think, you know, it's really hard to tell what these alternatives are at this point. There is no real definitive information on pricing or functionality from any of these players. So, we're hearing things, I think, there is a fair amount of noise in the marketplace. But I guess, my primary perspective here is that this is nothing new for us, we have many, many competitors in this business. Our traditional competitors -- every airline in the world with a website and a call center competes with us, with their own direct distribution, and now we have these new entrants.

So, we'll obviously watch them closely, but I must say, I think, these are products looking for a market. Corporations haven't asked for them. Travel agencies haven't asked for them. Consumers haven't asked for them. And I think that just makes for a very slow road.

Okay. And back in December, and again, today you alluded to a big ramp in earnings in 2006. I know, it's very early, but can you elaborate on what you mean by significant growth? But it seems like you maybe consolidating Zuji in 2006, which I guess, would be dilutive. I am trying to get a sense - you're going to get the investments done in '05, which lead to the big ramp in earnings, but is there a risk that you'll just find more investments going into '06?

Well, we certainly -- we are just now providing guidance for the first quarter of this year, so, Jim, we're not going to provide any guidance going into '06 just yet. I just -- suffice it to say, I think, we feel real good about our growth prospects as we make our way through 2005.

We are making lots of good investments here. We continue to improve our businesses, specifically Travelocity, and I think, we'll see some fairly significant improvement in Travelocity Europe, as we are applying more focused management resources there, as we are investing more than we had been. And I think that leads us in a good place for '06, but we are not - we are really not providing any further detail on that.

The only thing I feel compelled to call your attention to a little bit is 2005 and the actual growth characteristics of 2005, i.e., it is an investment year. We said that, we would numerate whoever making investments, but nonetheless, we are growing topline 10%, and our EPS range is 2 to 9%. So, I think, that's a pretty healthy blend of investment and growth even in 2005.

Okay. Thanks.

And thank you very much, sir. And next in queue, we go to the line of Brian Egger with Harris Nesbitt. Please go ahead.

Yes. Hi. Good morning. I just had two questions. First, I guess, more directed to Michelle on Travelocity. First of all, any new developments with respect to Medisearch sites, I know, you've been trying to holdback on providing inventory there, and I understand the nature of the standoff, but maybe any new developments in terms of disposition towards that channel or developments in that front? And relatively, any thick thoughts about long-term operating profit margin objectives for Travelocity? I have a pretty good sense of what your guidance implies for '05, but do you have any longer-term thinking about what the optimal long-term trajectory of profits in that business could be?

Sure, Brian. Let me start with vertical travel search. We really have not changed our position, as I said, I think on last quarterly call, that is really a simple question we ask ourselves, is it good for consumers, it could find supplier partners, is it good for us and our brand?

And we continue to believe the answer on that front is no on every question with respect to vertical travel search companies. In terms of long-term ideas, I mean, the good news is, I think, you'll discontinue to see margin expansion every year in the coming years at Travelocity. We have a lot of terrific opportunities in front of us. We are very encouraged on what we achieved in the domestic business.

And to us, it's a real template for what we can and will achieve in Europe and potentially Asia down the line. So I won't give any specific numbers, because I - again, we are not providing long-term guidance, but we just have a lot of opportunity in front of us and we feel like we've got a real platform with our domestic business to show what we can do.

You know, I might just comment a little bit more on the Medisearch engines. So, we've conveyed our philosophy as it relates to those search engines at Travelocity. I have been visiting with a lot of airlines here recently as well, and almost without exception; they have a very dim view of the Medisearch engines and what they do for their business. So, I think, there is kind of this universal unappeal of these search engines, this is the way they are conducted and this is the way they transact on the Internet. So, we'll see what happens, but I think, clearly, there is not a very positive view across the industry, and it's not just a Travelocity position.

Okay. Thank you.

Thank you very much, sir. And the next participant in queue is Justin Post with Merrill Lynch. Please go ahead.

Hi. A couple of questions; first, on the Travelocity bookings, they beat our forecast; it was - quite sequential, I think at 1.2. Can you comment on or if Europe is helping that number, and of course, quarter? And how do you think the industry trended in the quarter, I mean, was it a strong quarter overall for the whole industry? Secondly, on the GDS share, can you comment at all about how you think you faired versus other GDS companies? Did you gain share or lose share in the quarter? And that's all for now, and I'll have a follow-up.

First, let me start with Travelocity gross bookings. Europe has contributed, but it was a very small amount in the scheme of overall gross bookings. And we are just say pleased to see the gross bookings number look strong, especially in light of the similar phenomenon we had last quarter where airline pricing was actually down, and of course, we talked about last quarter that affect gross travel booked. With that plus we have anniversary total trip, so we still see really strong good bookings numbers, which were encouraged by.

Yes. And let me just talk to the GDS piece. Clearly, we've had a plan to increase our share over the course of the year and we did just that. So if you loot at - and we look at bookings every month, but our latest booking comparisons are for November, where our share was up about a point year-over-year. So, the travel network business continues to do a great job of attracting new business through that channel.

Okay. And can you comment at all -- I know, it's early, but what your thoughts are on pricing for the DCA? You know, what you're going to be saying to airlines and where you think that could come out or is it just too early at this point?

Well, I think, it's a little bit too early. You know, we recently rolled out our 2005 pricing initiative and say, saw some of those increases late last year. In terms of the future pricing actions, we are having constructive discussions with the airlines, really about the entire breadth of their distribution need. And I have talked about this before, I think, there is a lot more opportunity that goes beyond just travel network. But we are not really ready to discuss where those price points end up. I think we are clearly driving our pricing based on value delivered to the airlines and I have talked about those philosophies, but clearly with a neutral impact on average unit revenues.

Great. Thank you.

And our next question comes from the line of Jeff Kessler with Lehman Brothers. Please go ahead.

Good morning. It's Scott Siefers (ph) for Jeff Kessler. I am just curious, if you can make any comment on the expedient shift from what's been to Sabre, any updates there?

No real updates. And I commented in December on that and that we had included that very conservatively. Expedient bookings in our forecast for this year, we don't have much experience there as yet. We didn't expect - and I mentioned really since we announced the deal we didn't expect any material impact to our numbers last year. So, we have modeled it conservatively, and we expect to ramp up that business over the course of the year.

Great. Thank you. Any updates or color on your trend in inducements payments and maintaining the guidance or any updates there?

Yes. A couple of -- I think they're nonnumeric. You should expect generally the rate of growth to be slowing this year relative to prior years a little bit. One of the things, you know, its still growing faster than revenues, but you should expect it to slow this year somewhat relative to prior years. One of the things I do want to point and this goes to the quarterly guidance is that it appears that just we principally acquainted entity as contracts expire and we're in negotiation with a lot of agencies that one of the year-over-year drags on our first quarter, which, again, will help second, third and fourth quarter that we haven't talked about is the STN on incentives where the first quarter seems to be a little bit heavier than prior years on the incentive side. So, it puts a little bit more pressure on first quarter, helps second, third, and fourth.

Okay. Thanks. That's helpful.

Thank you very much Mr. Kessler. The next participant in queue is Scott Barry from Credit Suisse First Boston. Please go ahead.

Hi. This is Ed Loh for Scott. I have a couple of questions. First, can you discuss the likely timing of profitability in Travelocity's international operations?

We're not commenting on profitability. We did say that we do not expect Europe to be profitable in 2005. But again, we are encouraged by early signs in January on Europe in general, and we'll do with Europe exactly what we did with the United States, which is put out a higher margin products, have a cost discipline kind of overall turn that business to an operating margin. But we have not given a time frame yet.

Great. Again, that is a sort of a quarterly layout of Travelocity's profitability in the year. There's a narrowing of the losses in TU that's another one of the big factors of what I think is going to be a pretty dramatic quarter-over-quarter increase throughout the year.

For Travelocity, absolutely.

Right. Second, can you assess the recent changes in the Online Travel competitive landscape and how you guys currently evaluate the bill or buy decision?

Yes. Let me just start a little bit with kind of how we think about our business at Travelocity. We're very encouraged about over the first three quarters this year. We gain share on three really critical metrics, gross booking share, revenue share, and hotel room night share. And for us it was very important to demonstrate to you and to our shareholders that we could operate the business well. You've seen, just to try out, one number in the fourth quarter of last year, we were 39% bigger in revenue than Orbit's and as of the third quarter we're 80% bigger in revenue.

So, clearly demonstrating disciplined operational successful execution was a very important part of 2004 for us. And then, from an M&A perspective, as Sam mentioned, we'll look at it.

And again, a very disciplined prospect that you see are their areas where we really think that an acquisition could help accelerate progress. But we certainly won't be looking at acquisitions just to buy share.

Okay. And finally, can you guys provide an update on your initiatives that's creating more value-based pricing scheme in STN?

The initiatives? I just -- let me just talk a little bit about the philosophy for value-based pricing. We clearly recognize that there are different characteristics or profiles of customers that we serve. Some are short haul, some are long haul, some are a mix of those.

And so, as an example, we expect value pricing to recognize those differences between airlines or even between the types of passengers they carry. But again, I think we're pretty early in the process here to be talking in a whole lot more detail about what we plan to offer up.

And again, I think our intent here is to offer a portfolio of opportunities for the airlines that we serve and it goes beyond just the GDS distribution, it goes to direct distribution of what we offer up in our airlines solutions business, and also other types of products that we can make available to airlines.

And we've been successful with that here recently with Travelocity Hotel Program for their website, that type of thing. So, that's a high level philosophy of how we're engaging with the airlines, and we think we can deliver a lot of value. And in fact, we think we really -- we've delivered some very good price points already through the DCA three-year program. And that's another part of the dialogues that we're having with airlines, and in fact, I think, as they really dig into the numbers as we have that we've offered up a lot of value even through the existing program.

Great. Thank you guys.

Thank you very much Mr. Barry. And next we go to the line of Jake Fuller with Thomas Wiesel. Please go ahead.

As you look out to the first quarter with Travelocity's overall profit have a negative sign in front of it, your obviously taking a hit from the change in accounting and advertising, still losing money in Europe, so what's the overall outlook for that unit?

For the first quarter Travelocity does expect to have an operating loss, given the incremental losses we'll be assuming from Europe and the advertising accounting change. But its definitely that you -- we expect to see a real dramatic ramp in the improvement of profitability over the course of the year on overall guidance remains the same, which we will have a north o 100% improvement in operating income and margin in the single mid digits.

So, as you look out to 2Q for the unit, should that be a positive sign, or we still...

We won't go that far for you because you get paid a lot to do your spreadsheets. We'll hold off a bit and give you more guidance as we go forward.

All right. And as you look at the first quarter guidance specifically for the STN unit, would it be fair to say that on a year-over-year basis you're looking at a margin that's down?

Let me answer that. We aren't addressing the quarter, but we did give you a yearly guidance, which includes margins in the mid teens. Again, I'll reiterate that overall for the business, you see where we come out and that there's more incentive pressure in the first quarter than other quarters of the year, and I'll leave it at that.

Okay. And can you explain why the tax rate on the adjust -- or the adjusted tax rate was so low in the fourth quarter?

It's because of the reversal that I talked about in my remarks that totals about $5 million, which is a state income tax. It's a relief of reserves. And, in fact, just to comment a little bit about 2005, it's entirely possible that we'll have other adjustments that flow through kind of abruptly in the quarter as either. What drives those adjustments are settlements in audits with state or with federal government settlement and statute of limitations running when payments were made or when the year was closed out and things like that, and then they would run through the P&L as the year goes along.

So that reversal -- the benefit of that is included in your calculation of adjusted EPS in the fourth quarter?

Yes.

Okay. And the -- okay.

It's -- because those things are difficult to predict, the timing of reversals because they sometimes have to do with audit negotiations, we audit our 2005 outlook however does not have any specific reversals in it from the tax side.

So relative to the guidance, you provided at 17 to 21 cents for the quarter, if we -- if that guidance have presumed didn't include the reversal, so you would have been at 18 cents on a comparable basis?

I'm not going to do your math for you, but I will agree that our guidance really did not include the reversal.

Okay. Thank you.

And thank you very much Mr. Fuller. Our next question comes from the line of Michael Millman with Soleil Securities. Please go ahead.

Thank you. A couple of questions and maybe just a follow-up on that as well. Could you tell you, what your assumed adjusted tax rate is for '05 and maybe number share as well? And then, in addition to that, could -- for '05 what is the assumption that the consolidation of Europe adds to revenues in '05? And maybe you can also talk to us a little bit about, how much of some of your merchant programs or what percent of the GDS are now merchant programs, and where you think that's going in '05? Thank you.

Okay. Let me start at the top, and I will do my best, it's a long list. The assumed tax rate in our guidance is 34%, which is our certain standard steady state tax rate, if you will.

And again, that will go up or down, if there were these kinds of reversals that you saw in the fourth quarter, if those were to occur in 2005 that would go up or down, correspondingly. The number of shares is filed in our press release or as an attachment to our press release and I think, for 2000, it's approximately 134 million. The breakout of merchant revenue and some of the -- whether or not the exact amount of European revenue that is been quoted in Travelocity, now, we do not comment specifically on either of those two things. Did I get them all?

Yes, I think...

Yes.

We may have some more to share with you, as it relates to merchant content through the GDS over the course of time, but we're not ready to share that yet, Michael.

Back on the Europe, could you give us at least some flavor, we're talking about hit more or like 5% or more like 20% of the Travelocity numbers?

At this point, I think, we will just stick with what we've got.

And Michael, remember this is still a pretty new business for us having whole ownership on. So we're -- at this point it doesn't make sense to break those out.

Okay. Could I ask one more question?

Sure.

On your fourth quarter I think, your US, GDS bookings were up less than 1%, the employment numbers and there's some timing differences. But nonetheless for the US, they were up almost 6%. Maybe you can talk about why the big difference?

Well, I think that the number you were quoted with the global booking number, and certainly in the US, which I think, is probably where you're getting your employment data. Our bookings were up I think, on the order of 2.5% or so.

Right. And so -- very roughly, the gap there is due to two things. One you mentioned, which is timing. So when we're talking about bookings in the fourth quarter, generally therefore travel 30 days later, on average 30 to 40 days later. And second is Channel Shift, which is -- so the amount of bookings that go direct to those airlines on web sites or to their reservation centers. And that -- those two components are the gap but the gap is misleading because I imagine, it's much lower, if you actually get the timing thing right.

Very good. It just seems that 2% Channel shift for the year would be much less than what these numbers suggest?

Yes. I think, so -- just perhaps where are your minorities, this is not a gap that we are concerned about in terms of share by any stretch. And that's - that of course is what you might conclude in looking at these different numbers, which aren't necessarily apples-to-apples comparison. And certainly, we feel very good about our share and share improvements in North America.

Okay. Thank you very much.

And our next question comes from the line of Paul Keung with CIBC. Please go ahead.

At last. A question for Travelocity.

Yes.

When you guys actually saw an improvement in conversion rates and then brought essentially stabilized? I was wondering, if you could just comment on them, how those metrics have been recently and what direction they're going and what do you think, they can do in '05?

Sure. Paul, we have talked about this before. Its kind of hard to measure conversion rates just because there are so many variables changing. And even you know, fund sense, take a look at it, recent data from media metrics about this average time someone spends on the site of our competitors is about two minutes, and Travelocity is significantly higher in seven minutes.

And frankly, we hired an Expedia, so (inaudible) what conversion rate is. I will say, that one of the things, we looked at closely, when we introduce a new product so big new investment like flight navigator. We're very, very closely to make sure that the consumer uptick on it is strong. And that is something, we're seeing with the introduction of flight navigator is forensic. So in aggregate, it's a little bit hard to tell that we're feeling like as you look at the revenue numbers and look at the gross booking numbers and hotel room night numbers, those are two metrics of the house of the business and they look very strong.

Okay. So if anything is trending it's trending flat, not down or not up going, is that accurate?

Right. Again, its really hard -- I could have gone to details of this. But how do you measure, when you book a total shift, which is multiple components versus East Vancouver in the hotel separately.

So all of things effect how you really measure conversion. But in general, we feel like the real health of the business is exemplified in room night, Packaging revenue, total revenue, transaction revenue and gross bookings not also very strong.

Okay. And then another question, I'm looking at my very extensive model here. If I took a highly accurate estimate, my highly accurate estimate tell us what's in '04? How long do think, it will take Europe to reach those kind of margins, that I'm seeing in Travelocity this year?

Again, I love the way you guys all asked similar question, ones in different ways. We're not going to comment yet on Europe margin but I will say that I think, the big thing for us that 2004 was about proving to you and to our shareholders that we could turnaround the domestic business expect to see the same discipline, the same rigor and same introduction of high margin product.

Management talents in Europe and expect to see a similar turnaround overtime in European profitability. We're very pleased with even just how well the acquisition of the remaining assets, we had in Europe has gone. The team is working great together seeing much more cooperation, much faster rollout of technology and product and real engagement that's very encouraging.

That the whole run away was for two years or what would you say? No, no. Okay. At least my picture is clear. Okay.

You made us laugh, and that's a good thing.

I'm trying. All right. The last question on the STN business. I'm trying to understand that the lumpiness again of this incremental technology cost and also looking back at some of the technology spent from last several years, I know ATSE is burning off this year. Just curious when those that burn off? How significant that and as you look at technology spend this how much of that is sort of one quarter, two quarters versus the multi-year redundancy?

Let me take on the ATSC question first. We continue to spend a good chunk of our capital expenditure budget going toward the ATSC. We are in that. You know, we are rolled out on the domestic side all our customers. We're in the international pricing developmental stage. You know, it's a multi-year project, and we're very, very pleased with the results of the lower cost. You know, the thing that enables with slight navigator etcetera. So, it's going well and it's a long-term investment and important investment for the company. The second question was...

I think just overall investment. And I think, we just continue to apply overall in terms of overall technology investment. We apply the same discipline that we have your and you're out. Our view is that if we are investing more in one area of technology that we pull back in another area.

So we make this trade-offs every year, I think, we feel good about the investments we're making and what you might call from a steady state perspective, it also even incrementally and some of the new businesses that we are in progress on right now. So it's, I think, we apply a good discipline and set of trade-offs even based on the fact that we continue to invest and invest heavily in projects like ATSE.

And how much close regarding ATSE birds of this year?

I don't think that's a number and that's not a number...

It used to be a $20 million number on an annual basis are you going to put that?

No. We are not citing how much we're spending on it this year. We are seeing that the principal benefits from running few systems begin to hit next year.

In '06?

Yes.

And then CapEx so the outlook changed on that number for this year?

The outlook is 95 to 105 for this year.

No change. Okay. Thanks.

And thank you very, Keung. Next we go to line of Chris Gutek with Morgan Stanley. Please go ahead.

Thanks Michelle. If you look at Travelocity hotel nights booked in the fourth quarter grew 31%, and it had pretty good growth, but that's down sharply from the 61% growth in the third quarter. Certainly the mix shift in last couple years towards the higher margin merchant hotel booking and it's a big driver towards improving profitability. Is that that mix shift toward merchant hotels slowing down or playing out and therefore that source of margin improvement maybe pressured going forward?

So margin -- you don't see margin that in room night, but if you just look at room night there are two things that you have to remember here both total trip, which we didn't have rolled out in the first half of the year and frankly only have rolled out slightly by the third quarter. Well, publicly, this is a robust product as of fourth quarter last year. So the anniversary of total trip and we have the anniversary of our acquisition of WCC, World Choice Travel.

So the two of them contributes to some of the slowdown in room night numbers. I've been said that, of course, the room night numbers were growing out at significantly better than the market and our competitors.

So we're very excited. And I think, it goes back to something we talked about many times over the past few years, which is we just have a better model. We developed year behind and we really took that opportunity of how to develop a better model for suppliers and for consumers.

The IHT, we've talked about them certifying us but even more encouraging has been what we have done with IHT across Sabre. The thing that gets me so excited about our hotel businesses across Sabre we sell hotel rooms at a 30% premium, terrific for hotel. Apparently, our customers drink and eat more on the ground, which is obvious very good. And of course our cost structure is only about 55% in terms of total distribution costs. So hotel as look at Sabre customers and feel really energized about the opportunity to really grow that business. So we have taken IHT, as a case study and really worked across Sabre to improve their bookings, their mix, their volume, their share and they are excited as we are.

At top to that Michelle, as utilization rates in the high end hotel properties presumably continue to rise over the next couple of years, and recognizing you guys, do have also the long-term deals with these hotels, and your relation with the hotel, how confident are you that you will be able to get enough supply, enough room nights available at relatively discounted rates on a going forward basis or by contrast because spread that are capture by Travelocity for the hotel booking is that overtime?

Chris, we are obsessed about getting better and better and better. We will not for second ever be complacent about the value we provide for hotels. So in good times like we're seeing with some hotels now and in rough times, when they have a lot of rooms available, our job is to get more innovative in terms of -- and sophisticated in terms of -- the kind of merchandise and can do for them to improve technology. We've got a bunch of projects going on right now with some hotels to even take the next leap forward in technology connectivity.

So, I think, our job is to continue to adjust be more sophisticated, provide more value, and be more thoughtful about how we can really take on the challenges of the hotel industry and do right by our suppliers. So as long as we continue to do that, I have no concerns about neither the long-term margin in hotel business nor about access to availability.

I think, the other thing I'd add. I'm sure you read the same report that we have the hotel occupancy another best year, I think, that was five years ago, I think, it was 1999 was up about 70% range.

In high 60.

And, so I think, there are going to be situations where we -- their peak periods or peak weekends where it's more difficult to get access to inventory. But largely we feel very good about our position in terms both in terms of the relationships and in the terms of availability of inventory even in an up market.

Okay. And Michelle could you comment on marketing spending strategy for Travelocity for this year in general term?

You know, we're doing more of is that now we've established the brand, we've established the numerous. It gives us an opportunity to test different concepts so we've been testing things like more directly -- direct in responses. We certainly have optimized our online spend. Much improved last year over prior years. So we will increase overall advertising expense, not at the rate we're seeing revenue and gross bookings and like growth.

And we tend to use that to test different vehicles and different kind of capabilities that we have now that we have established a brand that we have gone through kind of the foundation to the brand building.

Great. And then for only Sam. That you mentioned, I might miss that on prior call, I think, you were saying pretty clearly that the Channel shift trend was slowing. Is that still the case? And if that is still case how should we reconcile that with what seems to be some pretty interesting numbers reported by the airlines for increased bookings -- percentage of booking done on websites and some other big airlines doing things like low price guarantees. To find -- offered to find the better place also, would that seem to reaccelerate that Channel shift?

No. I think we are going to continue to see the airlines promote their own websites and as they have in the past they well on the future. But I think, there -- the recent promotion was promoting fares that we have access to today as an example. And I think we feel good about the channel shift trends that we've been seeing over the last six months and we'll see into the future and how we model by going forward.

So we don't see any of the specific recent promotions or even growth in their websites as being a specific issue or concern as it relates to bookings through the GDS channel. An you'll recall that we -- we felt like not only having access to the inventory was and Ferris was helpful but also the improvement in corporate bookings was helpful because most of all bookings do go through travel management companies through GDS's and I think we expect to continue to see that.

The airline websites will continue to compete primarily, for the leisure travelers and the lower yield fares. And we want to continue doing a great job of hopefully providing them with twice the yield on the Ferris that we provide versus what they get at their own website.

Okay. And finally just a quick one for Jeff, there was a $7.3 million loss and sale of the server. What was that? And I guess it was taken out of the operating the adjusted numbers. Is that considered not an operating number or out there?

What that represented was a write-down of existing equipment. And we also entered into as a lease on new equipment, all of which is from the same manufacturer under one contract and represents tens of millions of dollars of operating income savings, over the next several years. So that's what -- we went through a long process of just consolidating servers across the company for midrange kinds of operations. And that's what that represents.

Right. Thank you.

Thank you very much, Gutek, well taking a look at the clock Mr. Gilliland, with that I'll turn the call back to you for your closing remarks.

All right. Well, in my closing remarks are simply to thank everybody for joining us here this morning and we look forward to talking with you here, as we make our way to New York and other places around the country to visit with you. Thanks.

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