Sabre Corp (SABR) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. Good morning, and welcome to Sabre Holdings Corporation's conference call to discuss the first-quarter 2005 results. At this time, all participants are in a listen-only mode. However, later, we will conduct a question-and-answer session, and those instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded on May 5, 2005, and is being rebroadcast live over the Internet.

With that being said, let's get right to this first-quarter agenda. And here with our opening remarks is Ms. Karen Fugate, Vice President of Investor Relations for Sabre Holdings. Good morning, Ms. Fugate, and please go ahead.

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

But before we get started, I would 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 for 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 of the Company's most recent Form 10-K filing with the SEC.

The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliations of our adjusting items and non-GAAP financial measures in our earnings press release and on our website.

Now, I would like to turn the call over to Sam.

Thank you, Karen. And thank you all for joining us. We had a very good first quarter (technical difficulty) exceeding the top end of our expectations. We are very pleased with these results. They are a testimony to the health of our business and the success of our strategy.

At Travelocity, disciplined execution and robust demand resulted in revenue growth of 32%. At Airline Solutions, we saw our second straight quarter of impressive margins and a year-over-year turnaround of more than $10 million in operating income. Sabre Travel Network also performed well. A combination of brisk demand and lower-than-expected incentives gave us better-than-expected results, while our merchandising efforts continued to bear fruit. And finally, we made progress on each of the strategic initiatives we laid out during our December outlook call. Jeff Jackson will provide more detail on the quarterly financials in a few minutes, but first I would like to cover some of the key highlights of our businesses.

Clearly, as our first-quarter results indicate, our businesses are fundamentally sound and we are using that strength to continue to deliver greater value to travel suppliers and consumers. Let's take a closer look at how that approach played out in the quarter, starting with Travelocity, where we saw impressive revenue growth.

One major contributor to this growth was packaging. This high-margin business grew significantly year over year, launching new features during the quarter including Walt Disney World tickets and, for the first time, tickets to numerous tours and shows in Las Vegas which come from Travelocity's ShowTickets.com.

We also improved our mix of high-margin business through hotel sales. We now have more than 19,000 properties in our merchant hotel program and, during the quarter, we rolled out our unmatched third-generation connectivity to Hyatt's central reservation system.

The first quarter at Travelocity was also a time for further developing our vision for Online Travel V2. After 18 months of work and significant investment, the team at Travelocity used the first quarter to ready itself for this week's full rollout of its service guarantee. Michelle will talk more about these efforts in a few minutes.

We also saw progress in our two corporate online businesses, with GetThere corporate trips growing 20% for the first quarter and Travelocity Business trips growing more than 60%.

I would like to touch next on Airline Solutions and its progress in the quarter. Our $10 million year-over-year improvement in operating income resulted primarily from our ability to size this business appropriately and steady improvement in the license fee and ASP airline software businesses. Airline Solutions continues to provide Sabre Holdings with a strong global footprint. In the first quarter alone, we implemented or announced deals with airlines from the US to Malaysia, to Europe, to New Zealand. Perhaps the biggest undertakings were the migration to our SabreSonic Suite at Frontier Airlines and Aeroflot. In the case of Aeroflot's migration, it included both reservations and travel agency distribution solutions. As you might imagine, migrating a carrier as large as Aeroflot to a new reservation and distribution platform is a huge undertaking. The bonus is that an additional 5,000 travel agency in Russia are now booking through Sabre.

We have also announced a new seven-year passenger reservations contract with Southwest Airlines, proving the value we continue to provide to this leading low-cost carrier.

Finally, we announced that Airline Solutions and Travel Network entered into a joint venture with Gulf Air to give Sabre a stronger presence throughout the Middle East, while further supporting this airline in the region.

Supporting our airline customers is also front and center at Sable Travel Network. We have much more flexibility today to provide pricing alternatives to airlines than we had prior to deregulation. We have developed new models, models that better align value to price, and we continue to have active and healthy dialogue with multiple airlines about these new models and our next generation of agreements.

But we also have great opportunities to provide value beyond price. Sabre Travel Network envisions a future where it is the world's leading travel marketing system with the world's leading GDS at its core. In the first quarter, we continued to make significant headway in using merchandising to help suppliers and consumers alike.

Since we launched Hotel Spotlight in August of 2004, we have received very positive feedback from hotels. Bookings have climbed significantly at participating properties, and the bookings we are delivering generate more value for our partners. That is because those consumers who book through the GDS typically yield higher rates for the hotel, and they use more of the hotel's services.

But Hotel Spotlight is only one example of our merchandising efforts. We also saw a strong uptake in sales of last-minute travel packages through the GDS, with our Agent59 offering. We continue to grow and strengthen Jurni Network, our leisure agency consortium, with almost 60 travel suppliers now participating in Jurni's preferred programs.

Nexion, the leading fully-automated host agency service in the US, passed the 1,000-agency mark in the quarter. SynXis, the preferred hotel connectivity and technology provider with purchased earlier this year, continued to grow nicely. SynXis saw increases of more than 30% in both revenue and properties year over year on a pro forma basis. And with the purchase and relaunch of IgoUgo, we are offering travelers new and better ways to search for travel.

While Sabre Travel Network has made a lot of progress in all these injuries, the business has not lost its keen focus on technology. We recently migrated American Express and Carlson Wagonlit's leisure group to our Air Travel Shopping Engine, ATSE. 97% of all North American travel agencies are now on this open system architecture.

In the end, it was the operational excellence across our portfolio, combined with steady travel demand, that drove solid quarterly financial results, including better-than-expected revenue and earnings. Throughout our businesses, we continued to see excellent performance from the initiatives that are differentiating us in the marketplace including packaging, merchandising, new content and technology.

Finally, I should mention that we have announced our quarterly dividend at $0.09 per share, and we are pleased to continue to enhance shareholder returns in this way.

And with that, let's go to Jeff for details on the financials.

Thanks, Sam. Strategic execution and operating excellence across all of our businesses continued to drive our financial performance. Travelocity achieved a very strong revenue quarter, Sabre Travel Network had its best revenue quarter since the early part of 2002, and Airline Solutions' earnings momentum for the fourth quarter continued. As a result, total company revenue for the first quarter was 582 million, growth of 8%. Total company operating income and margin on an adjusted basis was 79 million, a 14% margin. And on a GAAP basis, operating income was 71 million, a 12% margin. Earnings per share excluding adjusting items were $0.37, and on a GAAP basis, earnings per share were $0.44. Our GAAP earnings include an approximate $13 million gain net of taxes on the sale of our ownership interest in Caravelle, our French tour operator.

Now I will move onto business unit performance for the first quarter, starting with Sabre Travel Network. Revenue was 420 million, growth of 2% year over year. Transaction revenue was up 3% year over year, due to volume growth and our price increase to non-DCA3 customers implemented in January. However, overall growth was dampened by a continue decline in subscriber revenue.

Operating income for the quarter on an adjusted basis was 81 million, a margin of 19%, and on a GAAP basis was 76 million, a margin of 18%. Similar to what we experienced last year in our first quarter, incented expense was below our expectations, primarily due to the timing of closing certain subscriber renewals and conversions. We do expect incentives to be near plan levels for the remainder of the year.

Beginning this quarter, we are revising our bookings disclosure. As Sabre Travel Network business continues to evolve, and as we implement new and different pricing models, we may generate direct revenue from different types of transactions. So, going forward, we will discuss transactions through the Sabre system. A transaction is defined as a travel reservation that generates a fee paid directly to us from travel suppliers, travel agencies or corporate customers. This includes but is not limited to the following -- traditional booking fees paid by travel suppliers; non-traditional transaction fees paid by travel suppliers; transaction fees paid by travel agencies; and transaction fees paid by corporations for the use of our online booking tool. We will no longer include direct bookings from our international joint ventures, as we do not receive a direct fee for these reservations. And as a reminder, our share of earnings from these joint ventures is recognized as equity income in other revenue. Under this new methodology, total direct transactions processed in the quarter were 92 million, growth of 2% year over year.

Moving to Sabre Airline Solutions' first-quarter results, revenue was 63 million, an increase of 5%. We saw strong mid-teens growth in our products and service business from our license fee and eMergo product offerings. However, this growth was dampened somewhat by a larger-than-anticipated decline in our lower-margin custom developed software business. Airline Solutions recorded its highest-ever quarterly operating income, generating adjusted operating income of 10 million, a 16% margin on a GAAP margin and GAAP operating income of 9 million, a 15% margin. We are clearly seeing the benefits of the cost reduction initiatives implemented at Airline Solutions last year.

Now, for Travelocity first-quarter results. Gross travel booked for the quarter was approximately 1.6 billion, strong growth of 27% versus last year. Total revenue in the quarter was 147 million, strong growth of 32%. As a reminder, this includes the consolidation of our wholly-owned European operation. Total transaction revenue was 125 million, growth of 31%. Breaking down transaction revenue further, air transaction revenue grew 11% while non-air transaction revenue grew 48%. Packaging and hotel revenue continued to drive non-air transaction revenue. Packaging revenue grew 92%, while total room nights across the Travelocity network were up 32% year over year. We are extremely pleased with Travelocity's progress in all these key metrics, both versus our internal expectations as well as Travelocity's competitors.

Non-transaction revenue for Travelocity was 22 million, an increase of 36%. This growth was driven by GetThere corporate trip revenue, as well as lower joint venture losses due to the consolidation of Travelocity Europe. As a reminder, losses from Travelocity's remaining joint ventures were recorded as contra-revenue.

As expected, Travelocity had an operating loss for the quarter, 14 million on a GAAP basis and 12 million on an adjusted basis. The adjusted operating loss was higher than last year, primarily due to the following -- 9 million of incremental losses, as a result of consolidating Travelocity's European operations; and in addition, as we told you on our February call, effective this quarter we changed the way we account for Travelocity's advertising and marketing expense within the fiscal year. We now recognize the expense simply when incurred. This change had an approximate $8 million negative impact to Travelocity's operating earnings in the quarter. Remember, we expect this change to have a corresponding positive impact to Travelocity's earnings in the second half of the year.

Travelocity's North American business performed well this quarter and was profitable. It is this strong core fundamental performance that we believe keeps us on track to achieve the full-year guidance we provided you in December -- that is, low-double-digit margin for the domestic business and mid-single-digit margin for Travelocity overall.

Now, turning to other financial data for the quarter, adjusted EBITDA was 98 million and GAAP net income was 58 million. Free cash flow was 22 million, and cash provided by operating activities was 39 million. As a reminder, our free cash flow is calculated as cash flow from operations minus capital expenditures. During the quarter, we spent the remaining 43 million from our October 2004 share repurchase authorization and repurchased 2 million shares. We also purchased 840,000 shares under our alternative share settlement program for approximately 18 million. These shares will satisfy our obligations to deliver shares under our employee stock purchase and long-term incentive plans.

Additionally, we have received an authorization from our Board of Directors for another 100 million share repurchase program. As in the past, implementation of this program is at management's discretion, and will depend upon the best uses of our available cash.

Now, I will turn my remarks to our outlook for the full year and the second quarter. Our full-year expectations for Sabre Travel Network and Travelocity have not changed. Those are revenue growth in the low single digits, with operating margin in the mid-teens for Sabre Travel Network and Travelocity revenue growth of 25 to 30% year over year, and operating earnings growth is expected to be in excess of 100% year over year, with a mid-single-digit operating margin. We are adjusting Airline Solutions' full-year revenue growth expectation to be mid-single digits versus the approximately 10% growth we had previously provided. This is due to lower-than-expected airline software demand in the back half of the year. However, we continue to expect Airline Solutions' business to have healthy operating margins in the mid-teens.

While we have lowered Airline Solutions' revenue guidance, we still continue to expect total company revenue growth to approach 10% for the year. We expect earnings per share to be in the range of $1.50 to 1.60 on both an adjusted and GAAP basis. This range is unchanged from our adjusted EPS, but is an increase to our GAAP range, due to the sale of the Caravelle investment I mentioned earlier.

Before I get to second-quarter outlook, I want to remind you that the change in the way we account for Travelocity advertising and marketing expense is not expected to have a significant impact on Travelocity's second-quarter earnings. The negative impact we saw this quarter is expected to be balanced out by a corresponding positive impact in the third and fourth quarters. We do expect Travelocity to be profitable in the second quarter. For the second quarter, we expect total company revenue to be in the range of 600 million to 620 million, and we expect earnings per share, excluding adjusting items, to be in the range of $0.43 to $0.48, and on a GAAP basis to be in the range of $0.40 to $0.45.

And now, I would like to turn it over to Michelle.

Thanks, Jeff. As I walk through Travelocity's performance in the first quarter, you will begin to see two distinct themes emerging, both of which we are very excited about.

The first theme is that our core domestic leisure business continues to perform very strongly. Travelocity has registered another quarter of robust topline growth, and the metrics by which we measure our success are moving in the right direction at an impressive pace. We continue to benefit from our investments over the last two years, resulting in healthy and sustainable growth in all key lines of business, and our disciplined execution against the goals we laid out is yielding returns.

The second theme is that as we continue to drive the core business, we have not taken our eye off either innovation or new growth opportunities. On the innovation front, I will spend some time on a key move in our core business which, as another concrete milestone in our rollout of Online Travel V2, will continue to transform our company and our industry. And that's the launch of the Travelocity Service Guarantee which we announced on Monday.

On the gross line, I will take you through proof points on our top two priority growth segments, Europe and corporate.

Turning first to Travelocity's performance in the quarter, let me walk you through the key success barometers. The core of our business is converting the shoppers we get in the door into travel bookers. In our gross travel booked in the first quarter, we grew an impressive 27% year over year to reach 1.6 billion. Gross travel booked is a very high-level metric, but the real story is in the revenue we earned from those gross sales, and here again we saw total revenue grow at a very strong 32%. As we look deeper into revenue quality, a few key mix metrics are paramount. They are indicators of our move away from the yield of standalone air tickets to higher-margin, non-air products and merchant products such as hotels and packages.

First, non-air transaction revenue grew 48% year over year, hotel room nights grew by 32% and package revenue was up 92% year over year. As a result, we have gained share again in hotels and packaging. Our move from being an agent for standalone products to a retailer of full travel experiences plays out every day in destinations like Las Vegas. In Vegas, we continue to get exclusive access to hotel rooms, have doubled room nights booked over the last 12 months, sold more shows in Las Vegas than any of our travel competitors, and have a ground presence and run the box office of many of the leading hotels. Additionally, we are teaming up with Apple iPod leading up to the Las Vegas Centennial on a great total trip promotion to drive even more Travelocity customers to Las Vegas.

Turning to our bottom-line operating income, as Jeff relayed, we have made a lot of progress, and we are confident in our ability to drive significant margin improvement again this year. We continue to expect that we will grow full-year operating income in excess of 100% year over year. Additionally, we expect to be profitable in Q2 and robustly so in the back half of the year, when we expect our changes to advertising amortization to work in our favor.

Before moving on to our growth segments, I would like to talk to our key innovation in our core business, our launch on May 2nd of the Travelocity Service Guarantee. When I spoke to you at the beginning of the fourth quarter last year, I told you about our vision for Online Travel V2. It was a vision of Travelocity where we, as a true value-added retailer, fulfill our promise that the best trips start here, where we deliver consumer and supplier value in the broadest possible sense, beyond price alone, and where the Travelocity brand is differentiated through customer championship.

Our launch of the Travelocity Service Guarantee -- with our promise that everything about a customer's booking will be right or we'll work with our partners to make it right, right away -- is a huge step toward establishing our industry positioning as the customer champion. We believe that this will not only be a platform of differentiation for our brand, but a concrete reason why consumers should care about where they buy their travel. While we will always deliver the best prices, it's simply a non-negotiable. The guarantee can lift us out of pure commodity price comparison shopping.

Travelocity has always taken pride in acting as an advocate by giving travelers information that makes their trips better -- information like unbiased travel reviews of hotels and cruises, hotel room choice, airline seats left at the advertised price and total price for cars. But as I have discussed with many of you before, we have not done a good enough job of messaging this with our consumers to really differentiate our brand. Over the last 18 months, we set forth a program of sweeping changes we believe will uniquely position us for versus our competition. Our Customer Championship Team was formed with a full-time staff who spent thousands of hours reviewing customer feedback and prioritizing work to improve customer satisfaction. We have overhauled our policies to improve first-call resolution. We have implemented a sophisticated incident management system. We have had every employee go through Customer Championship training with intensive training of our call center agents, and we are now routinely proactively calling customers when things like hurricanes or hotel renovations could affect our travelers' plans.

Customer response has been nothing short of remarkable. On our customer satisfaction survey, our championship pilot registered a 22% increase in satisfaction. This is very significant.

And both our internal studies and external cases have demonstrated that excellence in problem resolution can be a greater royalty and viral marketing driver than an uneventful transaction. We have and will continue to launch more Customer Championship initiatives. And to summarize all of this for our customers, we have developed and posted the Traveler Bill of Rights prominently on our site. It is a promise to our customers that we intend to keep.

This is just the beginning of what will be a journey of continuous process improvement and culture creation at Travelocity. We will be talking a lot about it directly to our customers. TV and print media with service guarantee and customer championship messaging started late last week and includes a major placement in the Wall Street Journal today.

We do not think that our formula will be easily replicable. It's not just the tagline; it's fundamental delivery of value. And it is enabled not just by media and PR, but by the realignment of much of our organizations so that our products, policies and employees support our championship platform. We consider it a crucial hedge against the commoditizing forces entering the marketplace and a key driver of securing true customer loyalty to Travelocity.

Before we close out, I want to turn for a moment to our two growth businesses, Europe and corporate. Gross sales from our wholly-owned operations in Europe on a pro forma basis, as if we owned them only in 2004, were up over 60% year over year in the first quarter or over 50% on a local currency basis. In addition, growth of our Odija (ph) business in France has more than doubled our internal expectations.

We are also beginning to see the post-buy-in benefits of integration with .com as we move to global standards and platforms. For example, we recently consolidated our United Kingdom service center with our WNS partners, lowering our cost structure in the UK.

Finally, we are continuing the rollout of our global high-margin products in our European business. In the last four weeks, we extended our merchant hotel product to our businesses in Germany and Scandinavia, and expect to roll out to France this quarter. In the UK, our merchant hotel mix topped 70%.

And on the corporate side, GetThere significantly beat its record quarter for the corporate transactions. We also rolled out the first phase of a project that brings together the best (technical difficulty) Travelocity business and GetThere. The first phase delivered a redesigned hotel shopping path to GetThere customers, based upon the rich shopping experience of Travelocity. We have received great reviews from our corporate customers on the new design, and believe GetThere now has a very strong and sustainable source of differentiation from its competition.

GetThere also launched a new agency distributor program, resulting in 15 new distributors. In addition, GetThere's distribution relationship with Carlson Government has delivered seven government agencies to the GetThere direct government product.

Travelocity business continued to see excellent sequential and year-over-year booking growth for the quarter as a result of the successful ramp-up of Aetna, American Medical Association and many other customers. It also added the American Bar Association to its roster, and signed or won ant a number of major customers that we expect to announce later this quarter. Travelocity business continues to deliver technologies that give it cost and technology advantages over other agencies, including the launch this quarter of its new mid-office application.

So in summary, this was another fantastic quarter for Travelocity for our core domestic leisure business, and also for our emerging growth channels. We are proud of the turnaround our team has executed, and we are even more confident that innovation and differentiation will not only propel us on a path of continued topline growth and significant margin improvement, but will also further distance us from our competition in reinventing online travel.

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

Thanks, Michelle. Before we go to Q&A, I would like to just make a few summary comments. We are obviously quite pleased with where Travelocity ended the quarter. We will clearly see improvement in operating income the rest of the year, and the team is making great progress versus competitors. That is true of all of our businesses.

We also continue to make strong progress on the retailing front -- naturally, with Travelocity, with its merchant sales as a percentage of transaction revenue growing nicely -- but also in merchandising through Sabre Travel Network. We are just scratching the surface in offering higher-margin products through travel agencies. The team is now exceeding our internal plans for last-minute package sales, and we will simply keep adding more and more relevant content to our travel agent displays each month. So we'll continue to execute on our strategic initiatives throughout the year, while also addressing key challenges in our business -- pricing pressure, new entrants, et cetera. And as I've said in the past, we will address these opportunities and challenges as we have always. We will be aggressive, we will lead and we will be disciplined.

And with that, we will go to Q&A.

(OPERATOR INSTRUCTIONS). Jim Kissane, Bear Stearns.

Good job on the quarter. Just following up on your last comments there, there's been a lot of noise, obviously, in the market regarding the GDS alternatives. What are your thoughts regarding the viability of the different alternatives out there and the impact they may have on your pricing negotiations?

Nothing we have heard is really new at this point, so there were a number of announcements last week. I think those announcements were pretty consistent with what we heard back in the August timeframe.

Having said that, we obviously take any and all competition seriously. And I guess there's a little bit of wait and see here, because there isn't a lot of definition to both what these products are and how they are priced. So we hear a lot of things. We have not really seen anything definite. There isn't any kind of mass of customers, at least not yet, and so there's a lot unknown there. I guess were we are is simply engaged in our strategy and our discussions with a number of airlines on ways to work together post DCA3. And they are healthy, they are active discussions. They are good discussions, and we will just continue down the path.

Sam, you have repeatedly said that your goal was to hold prices neutral to current price points, post negotiation. Is that still your intention? And can you make a commitment here that you won't do deals where there's significant price cuts?

Well, I'm not going to make any commitments as to the specifics of any airline negotiation. So this is what is different this time, Jim. We have the opportunity to negotiate deals individually with airlines where we never had that opportunity in the past. So as you look at the environment out there, in the past, when we did a deal with one airline, we had to do essentially the same deal -- we had to offer up the same types of deals to other airlines. That's just not true here anymore, and so I think you'll see us negotiating individually. We will do specific deals with those airlines. Those terms of those deals and negotiations won't be public information. They will, as they should be, in an unregulated environment; they will be confidential agreements.

So I'm not going to make those types of commitments today on an individual basis. What we have said is that our intent, certainly our goal -- and I think it would be an obvious goal -- is that we keep our revenue neutral on a unit basis. So that's what we've set out for ourselves. We entered into negotiations with the carriers here, and have been in negotiations with the carriers and will be for, I imagine, what will take us through the terms of those agreements mid-next year.

And so we will update you, clearly, on our progress there. But you will see a lot less said by us or by other airlines as we negotiate those types of deals.

And, if I can just get one for Jeff, it seems like the first half is off to a stronger start than originally expected. I guess the incentives are having some impact, but your not changing your full-year earnings guidance. Is that a function of conservatism, or are you going to step up spending somewhere? Or is it the Airline Solutions impact? But I don't think Airline Solutions impact will be that great in the second half.

No, it's really reverting to kind of our planned spending level of incentives throughout the year, and our ability -- staying within the range of the guidance that we gave for the year. So as always, there are many moving parts, and the Airline Solutions revenue pulldown had a little bit to do with it. But the principal reason that we are staying where we are is because of the incentives reverting to plan.

Justin Post, Merrill Lynch.

Real quick, could you refresh us on the bookings percentage you provide to some of the major airlines in the US, so we can just kind of think about how important you are? I know you can't name specific airlines, but in general, can you address that?

And then, Michelle, maybe you can talk about the organic US growth, Travelocity revenue and bookings. Can you break that out for us?

Let me just talk on a very broad basis, as opposed to talking about any airline specifically. As I think you are probably aware, we have about 50% or a little less than 50% share of the North American market for bookings. And yet, we also -- the GDS market, if you will, is about half the bookings that are delivered to airlines. So I guess if you were to do the math there, you might see us with any given airline in the 20, 25, 30% range in terms of percentage of revenues delivered to them.

And just on the Travelocity organic US growth, we grew gross bookings on an organic basis in the US greater than 20%. And of course, that compares very favorably -- both our 27% and our North America 20%, or greater than 20%, compares very well to our competition, who announced lower numbers on both fronts.

And one quick housekeeping thing. I guess if you exclude the indirect bookings, you changed your disclosure slightly on the bookings number. Last year, I think it was 88 million, and this year it's 90 million -- 2 million more. Could you just describe exactly what those 2 million bookings are, and (multiple speakers) tell us why you changed the format?

In this case, they are not bookings, traditional bookings. There's a couple of different categories of bookings in there, but the principal addition to that number is GetThere trip fees -- or trips.

Chris Gutek, Morgan Stanley.

I wanted to follow up on the first line of questioning regarding some of these new entrants and some of the value proposition issues. As you know, the new entrants are talking about price points that are pretty dramatically lower than GDS price points. I think, Sam, you even said earlier this morning one of the keys to the value proposition was the GDS model is higher-yield. And I guess that argument presumes that there is a cause-and-effect relationship at work there. And maybe -- could you explain why you think there is a cause-and-effect relationship?

Well, I think, first of all, because in fact it is our relationships with the travel agencies, and they are contractual relationships that deliver those bookings to the airlines. So there is clearly a cause-and-effect in the relationships we have in the marketplace.

And then, secondly, it's just natural because the travel agent marketplace is a more opaque marketplace, if you will, that you are going to see higher yields in that market than you would otherwise. It's the same phenomenon that an airline would see or that Travelocity would see or its competitors would see between bookings made online and bookings made through their call centers.

So that's really what we are talking about there. And I know there has been some debate on that, but clearly we see that -- if you just look at yields through the GetThere online booking tool versus yields before a GetThere online booking tool has been implemented -- same thing. It's the exact same thing, that there's a lot more transparency.

Just to chime in on Travelocity, clearly, we see that, as Sam mentioned, both online and off-line. When you provide consumers transparently with tons more options and lower pricing, it tends to bring down the average yield, versus when you are offering them up exactly what they want in the first place if they call our call center, or if it's an off-line agency.

So just to be clear, I guess the value proposition therefore presumes that there will continue to be lots of travelers who will be willing to be put in something other than the lowest-cost possible seat, which, of course, business travelers presumably will, because they want the unrestricted fares. So I guess that is the crux of the business model, is there will continue to be lots of travelers who won't mind paying something above the cheapest available seats?

Well, I think it comes back to -- this all comes back, Chris, to service levels. So if you think about what a corporate traveler wants, the do want -- certainly, in terms of service from an airline, they want frequency that meets their schedules, and they want to book those flights that meet their schedules for various business meetings, whatever they may have.

And so this really, I think, comes to service as opposed to anything else. Whereas you might see a leisure customer willing to take a two-connection trip, business travelers typically don't want to make that type of trip. And that typically means an airline can charge more, and that's just kind of the plain and simple (multiple speakers).

Makes sense. Michelle, a quick question for you. There was one metric that wasn't disclosed in this press release that you had in the previous ones was the merchant mix as a percent of the total transaction revenue. Do you have that? And just more generally, could you comment on the availability not only of the merchant hotel inventory, but the availability of attractively-priced merchant hotel inventory?

Sure. So, Chris, on your first question, we did not disclose the merchant mix. Again, we continue to see great improvement, as you can imagine, from our numbers. When our pocketing business is growing at 92% and our hotel business is growing as strongly as it is growing, that merchant mix is doing well. Packaging revenue, which obviously is entirely merchant, grew at 92% and accounts for a greater portion of transaction revenue than it has in any quarter previously. So we are very pleased by that progress.

In terms of hotel availability, pricing supply and all the rest of it, we have actually seen some improvement, even since the fourth quarter, in availability being provided to us. And again, we have a better model for hoteliers -- from a technology perspective, from a process perspective and from a relationship perspective -- that continues to bear fruit, and it continues to be the reason we are seeing robust room rate growth when our competitors are not.

Eduardo Cabral (ph), GoldenTree Asset Management.

A question for you relates to your EBITDA margins for the quarter. It looks like, my calculation, the 98.2 you guys did about a 16.9 margin. That's down from the 18.6 that you guys did last year, if my calculations are correct, on an apples-to-apples basis; it looks like you guys did 100 million last year. What is the driver behind the decrease in margin?

It's some of the same things that we talked about in the script, that on a year-over-year basis, the TN business was -- and we're not talking about -- I'm principally focused on op-inc. But assuming there's a correlation there, Travelocity had an increased loss. We talked about the reasons for that -- Europe and a different accounting approach for advertising as we have spread it throughout the year. TN was about flat; Airline Solutions was a little bit better.

So TN was about flat?

Correct.

In the article of the new entrants -- and I understand that this is a claim that they have -- they claim that they can do an 81% discount to your bookings. Can you clarify as to whether that is apples-to-apples comparison, assuming that they are providing a similar service to yours?

Well, I think the last point is a big assumption. There will be no service that goes along with their product offering. They have said that there will be no incentives that go along with their product offering, or at least the incentives that are offered would come from the airlines as opposed to these new entrants. So there a lot of apples and oranges being compared here.

Clearly, as we look at our technology costs versus the technology costs of these new entrants, they are not dramatically different. So there are a lot of elements of our business that are not being reflected in these new models. So serving customers and providing reach around the world is one aspect. Certainly, the incentives are another aspect of it. So there are a lot of apples and oranges are.

And, Sam, let me just comment from the perspective of an agency. At the end of the day, for them to be successful, you need a bunch of agencies to feel that it's a better offering. From the perspective of one agency, at least, the technology doesn't seem to be nearly as compelling as what we see in the GDS. The service offering is not there. And clearly, the incentive model and the revenue model is not one that is at all attractive, from our perspective. So like all agencies, I'm sure, we will continue to watch this, but I don't see the real benefit.

And a final question. Can just review again your cash flow from ops that you mentioned and your free cash flow numbers? And then, I'll have a follow-up to that.

So cash flow from operations was 39 million, free cash flow at 22 million.

Now, that compares to a 49.5 for last year, cash flow from ops. And if I did my calculation correctly, 32 million of free cash flow. What is the driver of the decrease in cash flow?

Well, we probably ought to follow up with you on this one to work through the numbers. But as we pointed out in the script, we have a different definition of free cash flow this time, a simpler one, a more straightforward one, one that can be pulled right off of the 10-Q presentation format. And that's the principal driver. And then, Tom or Karen can follow up with you about the specific reconciliation following the call.

Brian Egger, Harris Nesbitt.

Just a question about your growth in packaging revenues, in the low 90's percentage range. I know one of your competitors referred to some incidents of slightly tighter supply of inventory for certain types of packaging and merchant sales, particularly due to very high occupancy rates in some leisure destinations like Las Vegas and Orlando, which I know are big kind of package markets. Have he seen anything similar, in terms of dynamics for inventory availability for your package business?

No. We are seeing a terrifically robust, healthy packaging business. Again, our growth rate on packaging was seven times our competitors' growth rate. And again, I think it comes down to fundamentals that we implemented years ago, in terms of how we build out relationships with suppliers. So we have not seen a real contraction in availability. We have also not seen any contraction in margin; it's actually the opposite. And we continue to see great improvement.

Would it be a fair assumption also that you are probably getting some share vis-a-vis your competitors in terms of access to merchant inventory? Or do you think you are just simply seeing something different in terms of the actual trends?

You can look at, for instance, there are some very clear places, right? IHG, Intercontinental Hotel Group, which pulled out of our competition. So clearly, there are places where we are getting access to inventory that our competitors are not. But also, I think we're just getting better and better at merchandising and destinations, working with our supplier partners. And we see and continue to see kind of a healthy business.

Scott Devitt, Legg Mason.

Most of my questions have been answered, just some housekeeping for Jeff. I was wondering what the full-year CapEx number is forecasted to be in 2005, and then also if you could just reconcile the sequential share count. I got the 3 million buyback, but it looks like shares declined by about 8 million. Maybe I missed the further explanation.

Well, the CapEx number is about 100 million. And I think we laid it out, what we bought back in the quarter, which was an aggregation of two separate programs. I think it was about 2 million and then another about 840,000 shares.

And then was your question year over year or quarter to quarters?

Actually, quarter to quarter.

So 4 million shares sequential between fourth quarter last year and first quarter this year.

Scott Kessler, S&P Equity Research.

I'm wondering -- a lot of your competitors have what I would refer to as multibrand strategies. I'm wondering how important that is going forward to you, and also how important you think having an opaque offering is, in terms of how you think about your service offerings in the future.

We have both. In Europe, we have multibrand offerings in several countries. In some places, we think that's working very well, and in other countries we're looking to consolidate some of our brands. Here in the US, we operate Site59 and actually are doing our first bit of advertising testing for Site59, given that continued strong business we have there. So we do have some of that, and I imagine we will continue to see that as we go further.

And in terms of your second question, Scott?

Opaque.

Oh, the opaque offering -- we consider the best opaque offering there is in the business to be our last-minute deals and also some of our total trip packaging offering, where consumers get the benefit of discounted pricing but also have the ability to pick their own flights, choose their hotel and really know before they go everything that is relevant to their trip.

So I guess what I'm getting at, if I could just follow up, is -- it's, at this point, your contention that your assets as currently constituted are things that you are happy with. You're not expecting to enhance or grow those assets, in terms of internal innovation or acquisition?

Everyone who knows me knows I am never satisfied, so we are constantly looking at ways to innovate and improve our position over time, and we'll continue to that.

But we won't be commenting on any M&A, which is consistent with our policy.

Scott Schneeberger, Lehman Brothers.

It's been about a year since Expedia announced that it would diversify some of its business off of its GDS Worldspan and bring a little toward you guys. We haven't heard much about that since then. Now, is there any update you can provide at this point?

Well, you haven't heard much about it because we both agreed -- Expedia and Sabre -- not to talk much about it. So that's really the primary reason. We had mentioned in our outlook call in December that we included Expedia in our numbers for 2005. We also said we don't have a lot of experience with that relationship just yet, and so we think what we modeled is conservative. But we'll just see. We haven't worked with them for a long time, and so we don't have as much experience there. And again, we have agreed mutually that it's best not to talk about the details of the relationship.

You mentioned, too, that there's some upcoming announcements in corporate business, and that's pretty exciting news. Will these be of the scale of an Aetna, or are they more smaller? And if you could just talk a little bit about the outlook for your GetThere Travelocity business?

Stay tuned. We obviously can't comment right now, but we did say they are major customers.

In terms of the overall outlook, we are in a really unique position, because the combination of GetThere and the long history that GetThere has in exceptional management of corporate travel, as well as Travelocity business -- and, frankly, Travelocity with the great kind of leisure look and feel in supplier relationships -- bringing that together is really powerful. Now, we have always said this is a long-term growth business. It's not as easy for a corporation to switch their agency as it is, for instance, for a consumer to switch where they buy their leisure travel. But we are making steady progress, and we continue to feel that the business will provide us with a great growth avenue going forward. But also, great for suppliers' yield improvement in terms of the kind of mix of travel we are selling, as well.

(OPERATOR INSTRUCTIONS). Michael Millman, Soleil Securities.

I wanted to, I guess, follow up on some of the things that have been asked earlier. That's relating to the G&E's (ph), and that is, to what extent would the pros and cons of either you acquiring a G&E or possibly how would it change the competitive climate if one of your competitors were to acquire one of these? And then I have a further question.

The short answer is, we certainly wouldn't comment on any M&A. And it's just been our policy to stick with that, and we won't change that today.

Well, but part of the question is competitive climate if someone else should own one.

I think we have been talking about a strategy which has been focused on getting to low cost for quite some time. So I've talked about how we've taken, what, 350 million in costs out over the last four years or so, about 80 million last year. We won't see as much come out this year as we will next, in terms of our cost structure, because there are a number of things that we will implement over time.

And so we are sticking with our strategy, which is we clearly want to be the low-cost provider. That doesn't necessarily mean we want to be the low-price provider. We do believe that we should get a premium for our product, based on our breadth, our reach, our relationships.

So, again, I would just simply say that we are sticking with our strategy. We will get to low-cost. We'll continue our focus there. And I'm not as concerned about what our specific competitors might do.

The other question -- I believe Michelle mentioned that a core strategy is to improve the relationship with users, but could you give us some of the possible quantification or metrics regarding what you are seeing in terms of repeat customers, and what you are seeing in terms of conversion, at least the trends?

We don't comment specifically -- and I've talked to some of you about this before, how it is really hard to constantly kind of look at apples to apples. For instance, when someone buys a package, it's much better than them buying two separate -- stand-alone air, stand-alone hotel. So things like conversion get a little bit harder to measure.

I will say a couple of things. One is in our pilot, as I mentioned, we saw a 22% increase in customer satisfaction as measured by surveys of customers, which is excellent. And even more importantly, we are not growing our advertising expense nearly at the rate, one, that we had been, or at the rate of gross sales and revenues. So you can infer from that that the health of the Travelocity brand, the product mix we have, the user experience is really turning more lookers into bookers.

Paul Keung, CIBC.

A couple of questions for Michelle, first. Given your recent progress on the corporate front, when do you expect to break even on the Travelocity business and GetThere business platform?

And then the second question for you, Michelle, is Expedia yesterday mentioned that they shifted a lot of their marketing expense from first quarter to second quarter, and that they expect to see continued improvements in efficiency lines. So I was wondering how that compares to your planning assumptions.

On the corporate front, Travelocity Corporate Solutions, which includes both the full-service Travelocity business and GetThere, had a positive contribution to Travelocity in the first quarter on an adjusted basis. And we expect it to have a positive contribution for the year on an adjusted basis, as well.

And in terms of the Expedia comment on their shift of media advertising spend, I will say that, apples to apples, our advertising expense -- again, we've got that change in accounting policy. But apples to apples, we were actually slightly down year over year on advertising and media. And that is in part because we do expect to smooth the curve, and we planned for it this year throughout the course of the year. Last year we had a bit more in the first quarter then we did in the back half, and we had planned going into this year to have a bit of a smoother curve. And we will see that. Of course, that is referring to the US business, the North American business. Advertising in Europe was, of course, up year over year.

Does that smoothing basically mean you have more competition, maybe perhaps even (indiscernible) later quarters this year, second and third, particularly?

The way I look at it, of course, is it's very encouraging to see the growth rates we saw in Travelocity without kind of increase in media spend, apples to apples, in the North American business. That is a very, very healthy, healthy dynamic to see one of our best ever, if not our best ever, kind of revenue growth quarter and gross bookings quarter. So it's very encouraging. And here, a lot of this is we are just getting better and better at optimizing our spend -- on an advertising basis, on an online search basis and an online advertising banners and the like. So I think the team has just done a great job. Of course, it's also attributed to the consistency in our advertising campaign -- the new website, the new look and feel, the new products. All of that is moving in the right direction.

(Indiscernible) satisfied. Two questions for Sam and Jeff, since there doesn't seem to be a limit today.

We try not to limit our analysts.

It goes on and on. One is on the incentive fees. What was your client assumption (ph) for incentive fees in the first quarter, and how much did you actually shift from the first quarter to later quarters?

And the second is, I was going through your commentary earlier on the buyback program. Do you plan to continue the 10b5-1 program for the rest of the year?

I will take the second one first. We are not addressing the levels or the amount or the timing of what we spend. I think we like using -- in the past, when we have bought back shares we have liked using a 10b5 program. But again, we are not commenting on the level or the timing or anything on the amounts that we would spend, simply saying that we have the authorization.

And the first question, Paul, was timing of --

The incentive, how much was that amount you are shifting?

Well, I don't know what you mean exactly by shifting. But we are --

Well, shifting -- you have a planning assumption for incentive fees for 2005. You said that it was less than you thought in the first quarter. You're keeping the same assumptions, so what was that amount that we are seeing moved over?

I'm not going to comment on the exact amount that shifts between quarters.

What was it for the year?

Well, we're going to be at our planned level for the year.

Which is what number?

Which we also didn't disclose.

Good try, though, Paul.

Well, when I'm last in (ph) questions, that means (ph) good ones I can ask you.

And then, I think, Paul, we're going to have to cut you off, man.

Yes, later.

No, go ahead.

No, I'm done.

Credit Suisse First Boston, Scott Barry.

Two high-level questions, I guess. One, Sam, you mentioned that you cut individual deals in the fully-deregulated environment with individual carriers. But aren't you limited strategically by your clients' real overriding need for full access to all available inventory?

And then, secondly, just hypothetically, if there is a post-DCA splintering into multiple channels -- say, agency direct, corporate client direct, the G&E's, et cetera -- are you guys considering any contingencies related to specifically the Sabre Travel Network cost structure?

Well, first of all, there's a group here that does a lot of analyzing of the futures and a lot of modeling over the next three years. So clearly, we would be building -- we build contingencies into all of our models.

On the first point, though, I think the fact that we can enter into individual agreements with airlines doesn't change the fact that we want to have full content for our customers. Now, it's possible that we will have different content by channel; that is entirely possible. If you look at, as an example, with GetThere, it already provides examples of that. GetThere connects to multiple GDS's; it connects to a lot of different places for content that is useful to the corporate customer. So we already know those models pretty well. But I think we may have different content by channel or by customer, but clearly we want to have access to full content. The nature of negotiations and the fact that in an unregulated environment, we can have individual agreements with the individual airline airlines as opposed to spreading the same deal across all airlines, doesn't have any impact on our goal of having full access to content.

Just that second question, again -- assuming there is, for a moment, a post-DCA splintering, where you see a splintering into multiple channels, enabled by, really, the post-deregulated environment, what would be your response to that?

It's a little unclear what you are theorizing on here. I think what I've said is that, clearly, we will be negotiating deals where we have access to the types of content that each of our channels needs. And in some cases, that may be different content; and, again, as I look at something like GetThere, the GDS doesn't offer access to all of the low-cost carriers, particularly in Europe. That doesn't keep GetThere from gaining access to that type of content on its own and offering that up to corporate customers.

Now, it may be a little bit different business model, and in fact, that's why we have decided to move from bookings to transaction, because we have a lot of different business models that are at work out there. And GetThere is one of them, clearly. We have different airline models for how we are approaching airlines in various markets around the world.

So, again, I would just say the goal is full access to content, but it may vary by channel. And I guess I wouldn't characterize that as splintering, necessarily. And yet, like I said before, we do lots of contingency planning, Scott.

Jake Fuller, Thomas Weisel Partners.

A question on the GDS side. When does the Expedia volume begin to layer in? And was there any in this quarter?

Again, we haven't talked about -- I mentioned this earlier, Jake, that we don't talk about the specifics of the Expedia relationship, or the timing of when we expect to see bookings begin flowing through Sabre.

And, Michelle, based on your comment about year-over-year domestic organic growth, would I be correct to assume that your domestic bookings were up 30 to 35% sequentially? And doesn't that imply European bookings -- and this is a wide range, but somewhere in the 26 to 90 million range? Are those accurate inferences?

That is a wide range. We don't comment on the breakout between the two. We did, obviously, give you a little bit of indication by saying that the North America business, on a gross bookings basis, was up over 20% over this quarter. But those are just not numbers we've provided, even last quarter, as well. So I'll let you keep doing your models, though.

And under the old GDS segment accounting, what would direct bookings have been in the quarter?

I would say I would characterize them as flat.

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

All right, thank you.

And if you have any closing remarks today, or --?

No closing remarks. Thanks, everybody, for joining us.

Very good. Thank you. And, ladies and gentlemen, your host is making this quarter's conference available for digitized reply. It's for two weeks starting at 12:30 PM Central Daylight Time May 5th, all the way through 11:59 PM May 19th. To access AT&T's Executive Replay Service, please dial 800-475-6701, and at the voice prompt enter today's conference ID of 778594. And that does conclude our earnings results for this first quarter. Thank you very much for your participation, as well as for using AT&T's Executive Teleconference Service. You may now disconnect.