Sabre Corp (SABR) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by we do appreciate your patience today and good morning welcome to the Sabre Holdings second quarter 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS]With that being said let's get right to the second quarter agenda and here with our opening remarks is Sabre Inc Vice President of Investor Relations, Ms. Karen Fugate. Please go ahead.

Thanks, Brent, and hello everyone. Thank you for joining us today. I'm here with Sam Gilliland, our CEO; Jeff Jackson, our Chief Financial Officer; and Michelle Peluso, our CEO Travelocity. Sam will review highlights for the quarter. Jeff will review our results in more detail. And Michelle will provide an update on Travelocity.

Before we get started I would like to remind all of you that some of the our comments on matters such as our forecasted revenues, earnings, transactions, operating margins,cash flow, contracts, or business, and trend information would constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ materially from our expectations. Those factors are described in the risk factor section on the Companies most recent form 10Q filing with the FCC. The Company undertakes no obligation to publically 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 thanks, everyone, for joining us. We are very pleased with our second quarter results. Our fundamentals in the quarter were strong, however we came into the second quarter with an aggressive set of assumptions and due to a lot of moving parts, such as the severance charge in assessments and investments in new business, we revised our assumptions, and updated guidance in late June to more accurately reflect the results we announced this morning. Those results show significant growth at each of our business units generated by increase demand for travel and strong execution by our team.

But before I turn to the second quarter, I would like to highlight some recent news from the last couple of weeks. First none the less, due to the completion of the Lastminute.com acquisition. We received final approval for the transaction on July 20. And we're already deep in the integration planning process. We're very excited about the addition of the Lastminute.com to our portfolio, we believe this asset will significantly extend our reach as a travel retailor increasing our international points of sale, dramatically.

Next on the list is Travelocity's extension of it's agreement with Yahoo. As you will recall, the agreement was set to expire at the end of 2005. Under this one year extension, Travelocity will continue to be the excusive provider of air, car, and hotel products to Yahoo travel. Michelle will talk more about this and the benefits to Travelocity, later in the call. And finally we're pleased to announce that our agreement with U.S. Airways, the first carrier to sign up for the DCA three year program, was extended. I'll provide more color on the airline prices discussions in a moment.

And now turning to our second quarter. Each of our businesses performed very well and each had a strong position in the global travel marketplace. Let's start with with Travelocity where we saw excellent performance. We continued to see outstanding revenue growth this quarter at 37%. Revenue growth not only exceeded our plans, but was also the highest we've seen in several years. This strong growth combined with narrow losses at Travelocity Europe, and key operating metrics that exceeded our expectations gave us an operating profit on both an adjusted and a GAAP basis. The biggest growth driver at Travelocity continues to be our merchant program, our total trip packaging offering, merchant hotels and sight 59 last minute deals. The business strategy we put in place at Travelocity three years ago continues to prove itself.

Our airline solutions business also performed very well in the quarter. We saw our third straight quarter of impressive performance with revenue growth across the business on flat expenses which drove year over year operating income growth of approximately 100%. We continue to see benefits from the changes made last year to size this business appropriately. Another reason for our success is our heavier focus on products with steady revenue streams, versus those with one time fees. A great example of this product in the annuity products is the new seven- year contract we announced during the quarter with Southwest Airlines.

Finally, our Airline Solutions Management Consulting business continues to expand our over airline relationships and supports our global expansion with more than 75% of its revenue coming from outside of the U.S. The story of Sabre Travel Network was one of very good execution in the core business we saw strong revenue and transaction growth. We made progress in merchandising through offline agencies and we continued on our trajectory toward gaining the low cost provider. We have also maintained our focus on news business models to provide new sources of revenue and accelerate our growth in nonair. In the second quarter we made significant progress with hotels. The travel network hotel business grew 14% year-over-year on a mix of volume price and new services. As part of that growth we also launched our Sabre Surround product a new bundle offer for hoteliers that combines a number of our marketing tools. Hotels that have participated have experienced significant new business at higher yields. During the quarter we welcomed Intercontinental Hotels Group as a Sabre Surround partner and we have gotten off to a great start with them.

In addition, SynXis our hotel connectivity and technology provider, increased volumes and signed new hotel chains and independent properties during the quarter including Millennium and Copthorne Hotels and Vie Hotel at Mandalay Bay. In addition to exceeding our financial expectations SynXis is helping us deepen our relationships with hoteliers, giving us better insight into the hotel industry, and helping hoteliers, especially independent properties thrive. We also made a number of significant changes to our technology development and devilery organization and these changes will accelerate our goal of being both the best and lowest cost technology provider in the business. While the changes focus on improving the overall effectiveness of our global development team, they also resulted in some immediate cost reductions.

Now, I want to talk briefly about the progress we're making on our next round of agreements with the airlines. Airlines understand our business model, a broad combination of distribution reach, enabling technology for airlines and travel agencies, a global service offering, deep relationships with customers, and long-term agency relationships. They also understand that every deal will be different, now that we're freed from regulation and they know that there there maybe advantages to striking a deal early in the process. In fact beyond extending our agreement with U.S. Airways we've had multiple airlines express interest in being among the first to renew.

Finally, a few additional thoughts about our purchase of Lastminute.com. We are very excited about this transaction because we expect to realize value in the following ways. Diversification of our revenue mix. Pushing Travelocity from a quarter of our revenue to about a third. Growth globally. Becoming the leading online travel business in Europe where online adoption is expected to more than double between 2004 and 2006. Through the contagious energy, an innovation of the Lastminute.com team, increasing the pool of talent of versatile people we have around the world and through the exciting technology in both both Companies which enhances our overall volume. We are encouraged by their total transaction value in the most recent quarter and integration planning is well underway. We recognize that some serious work lies ahead, but we have a very talented team engaged in this work. And Michelle and I are reviewing their progress each week.

So far we're very please with the work being done and even the espree decor that we see between our teams. It's still too early to provide updated financial results and projections for Lastminute.com, but Jeff will provide some further insights. So, it was a quarter spent with our eye on the ball and on the future. We made strategic investments in Europe and emerging businesses and in our existing businesses and we saw strong revenue growth across the portfolio. Finally, I should mention that we have announced our quarterly dividend at $0.09 per share and we are pleased to continue to enhance shareholders returns in this way. With that let's go to Jeff for details on the financials.

Thanks, Sam. This morning I will cover our second quarter results followed by outlook and end with a few items around the Lastminute.com acquisition and airline pricing. Starting with second quarter consolidated results. Total Company revenue was $619 million, growth of 12%. Total Company operating expense growth, year-over-year, is higher then our full-year growth expectations of the low teens. Primarily due to tough comps from the second quarter last year. If you recall in the second quarter of 2004, our expenses were lower then our expectations, impart due to expenditures that were delayed into the back half of 2004.

Total Company operating income, in margin on an adjusted basis, was $90 million a 15% margin. And on a GAAP basis operating income was $83 million, up 13% margins. earning per share, excluding adjusted items, were $0.42 and on a GAAP basis were $0.34. Our GAAP earnings included a $6 million loss, net of taxes, due to hedging activity. I will elaborate on our hedging activities further on in a moment.

Now moving to business unit performance for the second quarter starting with Sabre Travel Network. Revenue was $429 million year-over-year growth of 5%. Primarily driven by strong transaction growths of 6%. Operating income for the quarter on an adjusted basis was $72 million a margin of 17% and on a GAAP basis was $67 million a margin of 16%.

Our sequential and year-over-year margin decline was partially driven by layoffs, and -- by travel agents incentive growths and $3 million severance charge associated with layoffs in our product development group. This combined with our investments in emerging businesses puts pressure on our travel network margin. Adjusted EBITDA for Travel Network was $82 million.

Moving to Sabre Airlines Solutions second quarter results, revenue was $67 million an increase of 10%, five points of gross higher than last quarter. Revenue growth across the business was strong and we recorded robust adjusted operating income of $12 million and GAAP operating income of 411 million, both with a 17% margin. Adjusted EBITDA for the Airlines Solutions Business was $17 million.

Now moving to Travelocity. Travelocity results exceeded our expectations in most of the key financial and operating metrics this is quarter. These results I'll discuss do include the acquisition of Travelocity Europe, but do not include any Lastminute.com results. Gross travel booked for the quarter was 1.7 billion, robust growth of 35% and 31% gross year year-to-date. Moving on to Travelocity revenue. Total revenue in the quarter was $172 million. Healthy growth of 37%, and 35% growth year-to-date. We have seen a nice trajectory in revenue growth over the last several quarters. Total transaction revenue for the quarter was $147 million, growth of 37%, versus 31% growth in the first quarter.

Breaking down transaction revenue further. Stand alone air revenue grew 9% while nonair revenue grew 56%. Packaging and hotel revenue continued to drive transaction revenue. With a year-over-year increase of 41%. Non-transaction revenue for Travelocity was $25 million an increase of 38%. This growth was driven by GetThereCorprateTrip revenue as well as lower joint venture losses due to the consolidation of Travelocity Europe. As expected, Travelocity was profitable for the quarter. $7 million on a adjusted basis and $5 million on a GAAP basis. This represented approximately $18 million improvement over the first quarter. Losses from Travelocity Europe narrowed sequentially and represent an incremental $7 million loss over last year. And our North American business ended the quarter with very nice operating margin of low double-digits, in line with our full-year expectations. Finally, adjusted EBITDA for Travelocity in the quarter was $11 million.

Now turning to other total company financial data for the quarter. Total Company adjusted EBITDA was $109 million and GAAP net income was $44 million. Free cash flow was $92 million and cash provided by operating activities was $115 million.

Before I turn to outlook, I would like to discuss our hedging actions associated with the Lastminute.com transaction. When we announced the deal in mid-May, we purchased call options to cap the dollar amount of our purchase price. In addition to being the prudent course of action, the U.K. takeover regulations required a hedge to insure availability of funds to consummate the deal. The options cost $10 million U.S. and were almost completely expense in the second quarter, due to the devaluation of the pound and the euro. The good news is that the same devaluation that made our option decline in value also reduced our acquisition cost by $67 million in U.S. Right after the deal was approved we entered into forward contracts to lock in this lower purchase price.

Accounting rules require us to mark the forward contracts to market until funds settle on August 1. Earlier this week these contracts had an approximate $20 million negative mark to market. Assuming currency rates are at the same levels when the funds are settled, we would recognize this expense in our third quarter GAAP net income -- net earnings. However, we will see an equal offset in the purchase price of Lastminute.com.

Now turning to full-year outlook. Given that we're half way through the year, we're narrowing our total Company 2005 earnings per share range to $1.50 to $1.55 on an adjusted basis and $1.32 to $1.37 on a GAAP basis. We still expect full-year revenue growth to approach 10%. Full year adjusted EBITDA expectations per business units are as follows: Travelocity adjusted EBITDA of over $45 million and GAAP operating income of over $20 million. A 200% improvement year-over-year. Sabre Travel Network adjusted EBITDA of approximately $280 million and GAAP operating income of approximately $220 million. And Airline Solutions adjusted EBITDA of approximately $60 million and GAAP operating income of approximately $40 million. Our expectation for our total Company full year adjusted EBITDA is approximately $390 million and GAAP net income of approximately $180 million.

Now turning to total Company outlook in the third quarter. For the third quarter we expect total Company revenue to be in the range of $596 to $618 million. We expect earnings-per-share, excluding adjusting items to be in the range of $0.39 to $0.43 and on a GAAP basis to be in a range of $0.25 to $0.29. These total Company outlooks include several assumptions. First, we have not included Lastminute.com in our projections. We anticipate that by October we will be able to provide performance financial statements as well as a revised Travelocity forecast.

Second, Travelocity is expected to achieve significant earnings gross in the back half of year, keeping us on track to achieve greater than 100% operating income growth in a mid-single digit margin. This growth expectation is driven by strong North American operating results, narrowing losses in Travelocity Europe, and the positive impact for the change in how we account for advertising expense.

And third, included in our GAAP earnings per share, our look for the third quarter is an estimated $20 million negative, mark to market hedging impact , that I discussed earlier. Before I turn it over to Michelle, I would like to spend a few minutes on a couple of items, beginning with Lastminute.com.

The acquisition of Lastminute.com is not about business model transformation, it's about global presence, but most importantly it's about driving financial returns. We are buying a business we know very well. Evidenced by a financial turn around and operating success at Travelocity. While it's too early to provide you detailed financials, I think it's worthwhile to comment on a few key financial expectations. First, we believe Lastminute.com will drive Travelocity's share of revenue to approximately 1/3 of our total Company revenue. Reinforcing our strategy of increasing our position in faster growing businesses.

Second, this investment supports our strategy of international expansion. We believe the addition of Lastminute.com will push the share of international revenue for total Company to approximately 40%. Earnings growth is the key objective and we believe the combination of growth in European online travel are realize synergies will be accretive of 2006 on an adjusted basis and diluted on a GAAP basis . And further, we expect the transaction to be significantly accretive on a adjusted basis in 2007, as a majority of expected synergies come to fruition.

Now, I 'd like to spend a few minutes talking about our airline contracts. As Sam said, our DCA 3 contract with U.S. Airways was extended last week. We are actively engaged in discussions with all the U.S. majors and overall, these discussions have been quite positive. Across the entire set of customer relationships some airlines pricing may stay neutral while others increase or decline. But overall remains our goal for revenue, including merchandising revenue, to remain neutral on a per unit basis across the TM business over a several year period. Also keep in mind that our agency opting model, revenue reduction, is offset by a decline in agency incentives. If this opting model were to gain further transaction we would see a reduction in our average unit revenue, but remain neutral on an average earnings per unit. Now I would like to turn it over to Michelle.

Thanks, Jeff. I'm pleased to be reporting on another excellent quarter at Travelocity. Our core business registered very strong financial performance, marking our sixth straight quarter of robust growth. And of course, we have exciting news in our growth segments as well. From the close of our acquisition of Lastminute.com in Europe to key account gains for Travelocity business and the Travelocity partner network. We've also concluded an extension to our Yahoo! partnership, which I'll talk about later in the call. Finally, I'll highlight some of the early signs that our strategy of differentiation on a grand platform of customer championship is beginning to pay off.

First, let's take a look at the financials. Our top line metrics have come in ahead of expectations for the second quarter. Total revenue is up 37% versus prior year to $172 million on a base of gross travel booked of $1.7 billion or 35% growth year-over-year. And in North America alone gross travel booked grew 30%. Nonair transaction revenue grew 56% year-over-year, and total hotel room nights increased a very impressive 41%. Travelocity package revenue is up 81% year-over-year. Lastly and perhaps most importantly for our guidance last quarter, Travelocity operating income improved approximately $18 million, over the first quarter and was positive on both the GAAP and adjusted basis.

To break this down further our incremental losses in Travelocity Europe narrowed and were 7 million incremental to the second quarter of 2004. Our North America business was profitable with a low double-digit margin and remains on track for our full year guidance of low double-digits. We continue to focus aggressively on profitability and we expect significant improvements in the back half the year. Adjusted EBITDA for Travelocity , which we're reporting for the first time this quarter came in at $11 million. This performance is a result of head sound execution against our plans but also reflects the returns we are reaping from affected brand investment and from deployment of differentiation strategy.

We monitor two metrics internally as proof points. Our revenue gross versus our media spend gross and our share of segment media spend versus our share of segment revenue. While these matrix are not perfect science we are trending very positively. On a percentage basis North America transaction revenue gross out paced media spend gross by a factor of nearly seven times. When adjusting for the way in which we account for media spend. The picture is even more impressive when we look at the first half the year where media spend is down slightly year-over-year while North American revenue gross has obviously been strong.

In terms of the second matrix our share of media spend versus competitors has, by our best estimates, been on the decline. Our revenue growth, however, has surpassed that of our main competitors. We see these results as not only indicators of an effective media mix, but more importantly as a return on our brand. Driving this return are several key initiatives, investment in our brand platforms, the produce we offer, and our user experience.

I want to highlight just a few. Our launch of the Travelocity guarantee and our focus on customer championship under the umbrella of online travel V2, are resinating with consumers. Our customer satisfaction scores are up more than 19% for those aware of the guarantee. Second, we have refined and improved our branded advertising, with the Travelocity known and as visible and ubiquitous icon. We continue to be pleased with the performance of the known campaign as the important brand matrix remonitor looks very healthy.

Third, we have made a number of product enhancements which help drive involvement involvement in a total travel experience. Key among these enhancements is the addition of hundreds of travel extras to our product rooster, high margins, scalable destination offerings and services which are a great source of differentiation. Lastly, we have made great stride in personalization and relevancy with more to come. We haven't over engineered or over invested on this front. We'ver just done a few, simple, smart things that make a customer's experience with Travelocity, in any median, more relevant. As a result of more targeted sight personalization and email promotions our conversion rates on the campaigns we create are on the rise.

Before moving on to Europe I want to touch on two emerging areas where we're continuing to get traction and will help drive future growth for Travelocity. First our corporate business. GetThere continue to see robust year over year growths, hitting another transaction record in the second quarter. We have a major initiative underway to unite the policy capabilities of GetThere with the user experience of Travelocity, to bring the best of our booking tools to our corporate customers. The project took another major step forward in the second quarter with the integration of the Travelocity car shopping pass, including the award winning total price display.. The new design is receiving very positive customer reviews and we believe that we now have a true differentiator in the marketplace.

Travelocity business, also had a productive second quarter. We successfully launched our largest customer on July 1 and added other large accounts such as Discovery Communications, and Texas Tech University. We also began handling all of Liberty Mutual's business through our San Antonio service center. These large accounts are adding momentum to our corporate effort.

Moving on to the Travelocity Partner Network, we registered a big win with the expansion of our Continental Airlines relationship. Travelocity is now the sole supplier of hotel content for their sight. Performance out of the gate has been strong and further deepens our partnership with Continental. On another partner front, we have successfully concluded an agreement with Yahoo to extend our deal for another year. We're very pleased that Travelocity will continue to be the exclusive supplier of air, car and hotel product for Yahoo travel and we have built strong downside protections into the contract extensions to preserve the value of our investment in our partnership. Yahoo will continue their efforts in travel search, but as part of this deal we have decided to not participate in Yahoo fare chases versus media search model under either the Travelocity brand or the Yahoo travel brand. We have been crystal clear about our stand on media search. Because it focuses on only one variable in value equation price, we don't think it's a positive development for suppliers, consumers, or ourselves. Our decision not to participate in the media search offerings of either AOL, or Yahoo, should punctuate our stance on media search clearly. I hope I have been able to convey the magnitude of momentum that we have in the core Travelocity operation, as well as several emerging businesses.

With that I would like to walk you through some early thoughts on our growth opportunity in Europe and our acquisition of Lastminute.com. As Sam and Jeff have touched on, we cannot share our full financial results or synergy in integration numbers for Lastminute.com just yet , but there are some encouraging key performance matrix that we do want to share. Before I get into those I want to echo Sam's excitement about this deal. Together Travelocity and Lastminute.com is the leading online travel player in Europe and we expect that the complimentary sets of assets and people we each have will fuel innovation and strong growth in the future. I also want to take a moment to talk about the softer side of the deal, the people and the culture of our two Companies. It's a variable often underestimated but a crucial one for the success of any integration and the realization of the importance synergies that make this deal make sense. And on this front. I have great confidence. Both teams are energized by the combination and the cultural fit is excellent.

We like to describe ourselves at Travelocity as entrepreneurial and passionate about travel. I found these same values in Brent and the Lastminute.com team. It has made all the hard work we have done since the announcement in May, on integration planning go that much more smoothly. With that let me move on to some of Lastminute.com third quarter performance metrics. One of Lastminute.com's key metrics is total transaction value. Lastminute.com's June ending third quarter, total transaction value on a departure date basis is expected to be $311 million pounds sterling. Growth of 16% over the third quarter 2004. Order date, total transaction value showed a strong growth projected to be to up nearly 30%, year-over-year for the quarter. Obviously going forward we are watching this closely given the recent events in the U.K. As part of the acquisition we expect significant revenue and cost synergies. integration planning is our priority and is in full force. We have experienced intigraition task force made up of Sabre, Travelocity, and Lastminute.com staff, hard at work since the announcement developing detailed action plans to realize these synergies.

On the revenue side, we expect synergies of the Sabre Travel Network business by accelerates sales of Lastminute.com's trade business through the travel network relationships. Additionally, we will very quickly move to give all of Lastminute.com's distribution outlets access to Travelocity's global merchant hotel offerings and we expect to have that available by fall.

And then finally, Lastminute.com has great technology and product solutions in several areas and we expect that by the end of the year its robust vacation packages,and holiday auto offerings will be available on Travelocity Europe site. Several other quick hits exist, such as pointing all of Lastminute.com U.S. traffic to Travelocity run sights in the U.S. On the cost side we expect significant leverage from brand and technology reintegration , Travelocity Europe media spend will be aligned with our brand strategy. Lastminute.com will be the lead brand across Europe, although we will maintain a multi brand presence where it makes sense. We are currently exploring our branding alternatives, but we have started to scale back spending on Travelocity UK brand in anticipation of making Lastminute.com the lead brand.

Lastly, there are a variety of expect cost synergies and technologies, facilities, purchasing, and administrative functions where we will under take all of the normal post merger integration steps. More on these efforts will be forth coming. I'm going to wrap up here. It's been a tremendous quarter for Travelocity where disciplined execution against our strategy is paying off. Our new combined team will bring that same discipline and enthusiasm to our exciting new business in Europe. With that I'll turn it back to Sam.

All right. Thanks, Michelle. Before we go to Q and A, I 'd like to make just a few summary comments. We are now half way through the plan we laid out for you in December, we told you we would expand internationally and enhance retailing across our network, we now lead Europe in online travel and we continue to make city progress in our other retail efforts. e told you we would invest in leading scale technology and in the second quarter we t accelerated our technology transformation and we now have 100% of North America agents on our new air shopping and pricing platform.

We said we would optimize the core GDS by growing scale and reducing costs. While our growth continues our move to open systems and the better way of ways of producing technology are lowering our cost. We remain on strategy, we remain in a strong position in each of our business and that puts us in a strong position overall. So we'll continue to execute on our strategic incentives throughout the year while also addressing key challenging in our business. And we will do so,as we always have, with discipline, aggressiveness, and leadership. With that we'll go to Q and A.

Indeed, and thank you very much, Mr. Gilliland. [OPERATOR INSTRUCTIONS] First in queue we go to the line of Jim Kissane with Bear Stearns, please go ahead.

Thanks. Jeff, can you update us on channel shift, I don't think you mentioned on the call incentive trends and market share, or the GDS.

Sure, actually, all three are trending very similar to what they have done in recent quarters. So, channel shift, incentives,and market share are right where they've been all along.

Market share slightly up.

Okay. And any update on porting the Expedia bookings.

Why don't I talk about that. Hi, this Sam. Hi Jim. There 's been news about that and I guess the important thing to remember there is you shouldn't believe everything you read. We have a contract with Expedia. We have a very good relationship with them. And as they state stated bookings aren't flowing yet through that relationship, but we expect they will. We have very conservatively modeled , Expedia bookings into our forecast and we expect bookings over time. If you asked Expedia they would say the very same thing.

What do you think is taking so long?

I think and this part of what you might have read, I think is pretty factual. They need to apply more development resources to finish the connection and they have release schedule, just as Travelocity does, and it's in the queue so, I think bottom line is we expect bookings from that relationship. We have a very good relationship with them. We have a contract with them and over time, we expect the contract will deliver bookings.

Just one last question, how long is the extension with U.S. Air. And what would have happened had they not extended. My extense is they would have had an automatic price increase come October.

Well, there are a couple of things suppose that could have happened. First of all, I suppose they could have decided not to participate. Second, is they could decide to participate, but at much higher unit rates if you will, and, unit prices and the third was to continue at roughly similar terms and conditions which is what they opted to do. So, they've extended the relationship we had in place and we're very pleased with it . I think it's reflective of the value we're providing them from a distribution perspective. We hope to provide that same value overtime to the merged entity. We don't know exactly how that will all play out, but we think this puts us in a good position and I think lastly, just in terms of the term it is a one year extension beyond October, which is so, it's October 2006 now.

Thanks, Sam.

And thank you very much, Mr. Kissane. Next in queue is Brian Egger representing Harris Nesbitt.

Good morning. I have two questions, first of all just to clarify that under the extension of the U.S. airways, DCA agreement, I assume the pricing terms are basically sustained as they were in the original agreement and that I just wanted to ask if you have any general qualitative update regarding the general level of merchant markups for hotel Companies have things stabilized or have you seen any changes at all in terms of directional magnitude of merchant markup agreements?

Yes, so the first question, just a bit of a reiteration of what I said just a minute or two ago. In terms of pricing, terms and conditions they are, this is extension effectively of the DCA 3 agreement so that would imply very similar economics going forward.

On merchant margins, Brian, on the hotel side we continue to see the same kinds of merchant margins and we believe that long-term sustainable margins remain in the low 20s. And we see nothing on the horizon to change our view on that. We feel good about it.

The other thing I would add to that,is we often get questions about inventory availability because our compet talk from time to time about that, and we have seen no indication of any issues in terms of availability of inventory.

Now 41%, as you know, year-over-year and that of course is WCT anniversaried last year and that is really outstanding growth improvement

Okay thanks.

Thank you very much , Mr. Egger. Next we go to the line of Justin Post representing Merrill Lynch. Please go ahead.

A couple of questions for you. First, could you talk about the effect of your balance sheet of the Lastminute deal, how you might think about financing that and a couple follow-ups.

You bet, we are we will draw down on our bridge facility and use cash on the balance sheet on August 1 to complete the obtainment for the asset, and then we are in the process of evaluating a series of permanent financing alternatives, which would include cash, debt, short and long-term debt, quasi-equity, and equity, and so one of the things I do want to add -- is one of the things about the last minute acquisition was very positive is they did generated more cash than we had expected, or modeled in the deal model so that gives us a little more flexibility then we thought going in in terms of set-- determining our financial plans. But we'll work through that in the fall time frame, and we'll elaborate where our cash and balance sheet looks like after that.

Is the buy back program, a little bit on hold until this is settled?

That's correct.

Okay great. Second question. SynXis modeled some pretty good synergies in for there acquisitions of Ebooker and Gullivers. Have you look at that and can you elaborate a little on what you're expected with the deal at this point.

We have done extensive modeling on this transaction. We have looked at it compared to share buy back and all the classic evaluation metrics. We do expect, as Michelle, kind of elaborated on. I take some comfort from the fact that we're able to articulate how the teams are working together and actually going out and getting these synergies and we're well underway. We're ahead of some of our synergy plans. But as I talked about in driving earnings a lot of the synergies really start to ramp up considerably in 2006 and back half of 2006 and into 2007. So,

I think we're going to be --

-- this is a transaction we really do expect to drive earnings, both from the underlying performance of last minute, Travelocity Europe and Synergies.

And I know you're anxious to hear more details and we're anxious to share more details, we'll be able to do that around third quarter time frame.

Okay. Last question. And I believe, Michelle, you said 30% North American bookings growth for Travelocity which we think compares favorably to your peers. I think part of this is definitely the merchant program, signing up the merchant hotel rooms, wouldn't that really start on a year-over-year basis and when do you think you might face some more difficult comps on that.

Well, Justin, we feel great about our numbers this quarter, as I'm sure you can hear. The 30% number North America was gross travel booked, so that doesn't even take into account the kind of benefit you see in revenue from shifting towards merchant. That's just gross travel booked and that was up 30% in North America. In terms of just our merchant mix, you know we have been on a relent less path to improve our revenue per transaction, primarily by moving to high margin products and that started a couple years ago and continues full force.

Thank you.

So to clarify,we're not really taking advantage of kind of annual anniversary here this is now a multi-year trend.

That's right this is all organic kind of multi-year trend. And I should of course mention that it compares very favorably and this is the same thing that held true in the first quarter where we grew growth sales, and revenue, and room nights, and packaging revenue at a significantly faster pace then our competitors, from what we see of the second quarter that is also true.

Okay. Thank you,.

Just one other thing I would say we're chopping at the bit to share more on this, and as you can imagine, we closed this deal just a week ago so we have more work to do from a financial perspective, not the least of which is just taking their numbers to U.S. GAAP. We have some work ahead of us, we feel good about the integration planning that's been underway, and clearly we want to share more as we get to the third quarter call.

Thanks again.

And thank you,Mr. Post. We go to the line with Scott Kessler, with Standard and Pours. Please go ahead, sir.

Hi, Thanks very much. I guess what I'm interested in, I think it was referenced that Travelocity after, Lastminute deal, accounts for roughly a third of what constitutes Sabre and I'm wondering if you can elaborate a little bit on whether going forward you see the Company as it's currently constituting, meaning would you think about spinoffs or sales of assets those types of thing, I don't necessarily expect a detail response to some extent, but obviously that's in keeping with the fact that the last time we were altogether I asked a question about whether you were happy with the current asset-base and you indicated yes and weeks later you announced the proposed acquisition of Lastminute. So, I understand we're not going to expect a lot of detail in response, but I'm curious about how you think about your asset mix currently, particularly as Travelocity continues to become a much larger piece of favor. Thanks a lot.

Well, I would just underline the last phrase of your comment there, that Travelocity is becoming a larger part of Sabre, which clearly we are very excited and pleased with and it just continues the strategy we've had for, what now it's almost ten years I suppose we've been in that business, and it has been all about revenue diversification. This gives us the opportunity to geographically diversify those revenues.

So in terms of how we think about our current situation today, our portfolio, and the addition of Lastminute this simply improves our view of the portfolio and unfortunately I won't touch really the rest of the question which is, you know are we considering other structures. As you can imagine we look at things like shareholder return all the time. We're not particularly happy with our current stock price, frankly, and so these are the types of things that we look at. On the other hand, I feel very good about the profile of the business based on where we were prior to Lastminute, but now even more so with Lastminute as a part of the family.

So, if I could just follow-up. What do you think, the investing public is missing at this point because obviously the stock price not with standing some favorable data points that have been communicated over the past year -- hasn't really reflected what is being communicated by you guys, and I'm wondering what your thoughts are in terms of how you can enhance that.

I think two things, two things and specifically a lot of it is around DCA 3 agreements and we indicated progress this morning with the U.S. Airways extension, we know we have a fare amount more work to do. It is a good data point, however, and it is reflective of the value we are delivering to US Airways. . That is good news. It puts us in a stronger position as we continue our discussions with the other airlines and it eliminates a question mark around October. I got a lot of questions about October and really my comment there was I wasn't so concerned about that because I did think that U.S. Airways would see value in that distribution. Weather at current DCA 3 levels or if they decided not to continue in that vein at much higher rates later this year. We're very encouraged by it, we feel good about it, we have a lot of work to do with the other airlines but those are also very productive discussions. So I hear a lot about new entrance and so on and I think that actually also contributes to where our stock prices is, we need to and we'll make progress with the other airlines here over time.

The other thing I would say is, we need to continue to demonstrate improvement and profitability in Travelocity and as we do that I think that will also be a good indicator and improve our position and clearly we're on a very good trajectory there and the Lastminute.com acquisition does nothing but improve that position. So, those are the two things I would state.

Great. Thanks a lot I appreciate it.

Thank you very much, Mr. Kessler. Our next question comes from the line of Steve[Velgauts] with Caffey Financial. Go ahead, please.

A couple of questions I think you alluded to U.S. Airways merger with America West and having to potentially negotiate with America West. I take it that the contract extension that you signed would still be in effect after that merger, but that you would be pursuing America West among other airlines in terms of , either longer term contracts or some other extension of the existing contract.

I would say all the assumptions you stated are correct.

If everyone's concern was October, I imagine it's still -- would concern these renewals or new contracts is your f preference going into trying to get back in the situation of three year type contracts and then kind of deal with the same type issue two years from now or how can you, how do you go about those negotiations.

I think and the good news is we have a lot of flexibility in how we structure these arrangements and that comes because of deregulations. I imagine every deal will be a bit different and some will be three years some will be two years some maybe ten years. So, they will likely, vary in their term, that's perfectly fine by us and they will vary in terms and conditions and in pricing and we don't --we haven't made a huge big deal of this U.S. Airways extension, we're very pleased about it, on the other hand we don't intend to spend a lot of time, unless compelled to, about our relationships with the airlines going forward. But I think there will be a lot of variation in terms of how we are negotiating and contracting with the individual airlines.

Okay and then just a question on Lastminute, I know that in 2007 you made the distinction of it being significantly accretive to adjusted DPS. Is that -- hate to be too picky here, but when you refer to significantly accretive is that according to the European , merger regulations that it's some specific or --

No, no, no, I think if you stick by a protocol used in Europe this thing is more than significantly acreetive. That's the U.S. definition of the word which is large.

Right. Okay.

Meaningful.

That's fine, I think those of us that have looked at it appreciate that there is a lot of synergy opportunities here and I do wonder if before October we might get at least historical Lastminute.com figures more on a US GAAP basis or will we have to wait for October for that.

I use the word significantly in '07 not '06.

Yes.

I want to make sure I clarified that.

The other thing I would say, just to clarify this as well, none of our underlying assumptions around cost and revenues synergies have changed and so we feel very good about that in fact we see, opportunities, versus what we'd originally modeled as we dig in further into this deal. On the other hand, we do have the strengthening dollar so that will change things as well and we'll have to watch that and pay attention to this over the course of time.

That is one of the big reasons in addition to finishing up the U.S. --sorry the U.K. to U.S. GAAP reconciliation work that we aren't saying more right now.

t I will say you will continue to hear announcements like the important synergies we talked about on the first call, taking all of our merchant hotel content making it available to Lastminute.com we expect to have that done in the fall. We're already ramping down our U.K. trend on Travelocity.U.K. We expect to take some great product and power to the Travelocity Europe sights, again by this year, so we're, very hard at work on those things this we outlined as the most important synergies and most important reasons for doing the deal.

Okay, thank you.

And thank you very much, Mr. Velaguts. Next we go to the line of Scott Devitts representing Lake Mason. Please go ahead.

Thanks. I have two questions first relate today Travelocity last minute. I was wondering, I'm assuming when you looked at the deal you looked at it on a proacquisition synergy basis and I was wondering if you could give any color as to what on a last minute calander basis would look like preaqucisition, pre synergy, EBITDA. If not, secondary to that maybe what Travelocity historically on annualized basis has been spending in Europe on branding. And then separately, on the GDS business. You've restructured that business over time and just wondering from a sensitivity analysis standpoint as some of these agreements get renegotiate if there is any changes in economics, if you can give us color on fixed variable and what we could assume in terms of changes there. Thanks.

I'll these are all hard questions that we aren't going to be able to elaborate on. In particular, the predeal, op earnings of last minute either on a calendar or any other basis is not something we're prepared to talk about. As I said, we're, the important thing now, is the guidance that we have given and the reconciliation work and getting the synergies and I think what we wanted to convey today is that we're very pleased with the underlying work and the working between the teams that produces these results and we're a couple months away from giving you a financial forecast and those are the things that are going to matter going forward.

Did you have any follow-up questions Mr. Devitts?

Yes, the Travelocity marketing spend, and then the fixed variable and the GDS.

I take that. We haven't talked Travelocity specific marketing trend in Europe, we have said of course that our loss narrows versus the first quarter on a year-over-year basis and we expect that that will continue to trend in the same direction particularly as we have a lot of opportunity with Lastminute.com to make it the lead brand and we think it's a more effective marking investment vechile then Travelocity Europe brands at this point. We can't give out specifics, Scott, and I'm sorry about that but we're certainly are excited to be able to share more of that with you as we get closer to the third quarter call.

And, Scott, could you restate the third part of that question. Regarding the fixed and variable economic. The GDS business, your business, has been rationalized in terms of head count and such I'm just wondering from a sensitivity standpoint, I'm not assuming that the economics of the contract change, but if they should, how should we look at your ability to manage that through operating efficiencies in terms of if the agreements are impacted 1%, negatively going forward on new agreements how can we look at changes and operating expenses to manage against that.

You know, historically the relationship between fix and variable in this business is 60/40. But you know one of the things I think you can take comfort in is that over time this Management Team and this leadership of this business has been able to even go after the fixed costs that are embedded in the business and so, because you know there is no cost that is fixed forever, it is really how long it takes one to take the costs out of the business and the impact it would have on the revenue line. But in the short-term it's 60/40 and over time we'll be able to continue to take out some of the those fixed costs if the pricing environment would change.

Thanks a lot.

Next we go to the line of Scott [Schneivberger] representing Lehman Brothers.

Hey, good morning. Some questions around the third quarter guidance. I guess a little lower then had expected and maintaining the full-year implies a little bit stronger fourth quarter than I expected, is that timing of inducement fees or could you speak a little about the geography of that.

It's a little bit about what you said. It's a little bit about what we talked about in the scripts, which is the ramp up of the growth rate of Travelocity accelerating throughout the year.

Fair enough. One further question, I think you said on the fourth quarter call the outlook for the year for free cash flow was 200 million and I don't recall that being changed is that still the case?

That is still the case.

That is still the case.

And next we go to the line of Jake Fuller representing Thomas Weisel Partners. Please go ahead.

Hey guys. Jeff, regarding the U.S. Air contract can you say if pricing is up or pricing is down and also are there any changes in how the pricing model works?

I could, but I don't plan to Jake. I guess though that I will simply say that an extension implies very similar terms and conditions. And I'm going to stick with that and I'm trying to give a bit of a indication and I know it makes it harder for you and others to model these types of things, but I am trying to give an indication that we don't really intend to lay out what we consider to be confidential agreements and that's what changes here with the deregulation. So we may be in some cases be compelled to provide more information, but in many cases not and that's what we're working here with the U.S. Airways deal.

And on the Travelocity side any breakout in terms of relative growth rates between Europe and the U.S.

No, Jake, but what I will reiterate again is in North America alone we grew gross travel booked at 30%, so that is without Europe and that's again, North America second quarter over last year so we're really encouraged by the health of North America business an are anxious and eager to take the same discipline to Europe.

And also I didn't quite understand the European loss indication you gave, you said the incremental loss was 7 million versus the second quarter last year but you hadn't consolidated it last year.

That's right. Remember last year we had a joint venture so, on a year-over-year basis the incremental losses were $7 million. And that loss. That incremental loss narrowed from the first quarter when it it was larger.

So, you're saying compared to the JV loss you recorded last year, you're adding on $7 million for the loss.

That's correct.

That's right.

It was a 50/50 JV. You never broke out what the JV loss was last year. Correct?

No, we didn't. We know you want more visibility into Europe and we're looking forward to providing that as we get closer to the third quarter call.

Okay. Thanks.

Thank you very much, Mr. Fuller. Next we go to the line of Michael Millman with .

Thank you. Just a follow-up on that last comment. Could you say whether the Europe loss -- compare the Europe loss in the second quarter to first quarter, not year-over-year.

We said, in the first quarter, we had an incremental loss of $11 million year-over-year and that loss has narrowed in the second quarter and it was also a loss the absolute terms loss, sorry that is was $9 million in the first quarter year-over-year and $7 million in the second quarter year-over-year. So the losses are narrowing and that reflects our ability to roll-out high margin merchant products, to get more effective in our brand spends, and we think those kinds of trajectory are improved by the acquisition of Lastminute.com.

Can you just give us what the loss or the incremental loss in the first -- or the loss second versus first quarter not year-over-year.

I wish I could but we're not providing that information at this point. As we get closer to the third quarter call and we really are able to reconcile on a GAAP basis Lastminute.com financials that will give us much more ability to talk about the combined Europe entity and what we think it will help to drive in terms of overall margin expansion in Travelocity.

Okay. Maybe a larger question.

Michael, one other thing that might be helpful just to remind you of something we did say. We obviously gave you the Travelocity margin for the whole business and we did give you words around where there are expectations for the full-year domestic margin.

Maybe you could repeat those.

Sure, that's low double-digit operating margin for the North American business and remember that reflects a huge turnaround from where we were just 18 months ago in the North America business. Talking about the business and following up.

-- low teens.

On a adjusted basis.

Low, and teens, low teens would be, teen start at 13%.

I think so.

Okay. You talk about, your strength in bookings in North America and there have been some suggestions comparing with send dent, so curious as when we looked at this year, and looked at send dent travel distribution, kind of similar but maybe a little smaller then, Sabre, yet, their projected to have EBITDA at $650 million this year and grow about 40% Into '06 and yet you're projecting roughly $400 million and it doesn't sound like your suggesting growth of 40% next year, so could you maybe discuss with us, why you think there is such a difference?

Very hard for us to comment on send dents numbers, obviously, I'll kick to it Jeff in the broader, but I will say on the Travelocity margin side we've been on a relentless path to improve margins in our North American business and we expect to see the same in our European businesses. It is just too early for us to give you specifics. We haven't done all the reconciliations that we need to do or fully mapped out the synergies and on a broader TSG perspective I think we haven't provided guidance for next year.

We haven't provided any information as yet for next year. And one other clarification I would provide so we're not getting into issues of know men clayture. Where do teens start and that is to clarify in terms of the margins low double-digit and low double-digit is not teens. My understanding, and I can be corrected here, but my understanding is teens start at 13 and so we're talking low double-digits not teens, okay and that is for North America.

That's the full-year.

Yes.

Yes. And that's on a adjusted basis.

And did you say what it was for the second quarter, North America?

We did, we said on an adjusted basis, North America was in the low double-digits which remains on track for our full-year guidance. Thank you very much.

We have a question now from the line of Paul Keung representing CIBC. Please go ahead, sir.

I have one.

Hi, Paul. I won't ask you to repeat yourself.

I appreciate your disclosure on EBITDA division. If we take those figure in account and the comments on your playing assumptions to maintain neutral, I was curious if you look into the future do you expect the capital on the business, and the cost in the business to improve, perhaps drive earnings per booking per segment over time and share some of those savings with your partners.

I guess I would just say that that's not something that we'd probably comment on at this time. I think clearly we understand that the airlines need to take costs down and so what we have been doing is talking with them, how can we help them with their goals help them with ours, and really accommodate the larger travel marketplace as well. What Jeff said during the formal portion of the call, was that in fact, there are going to be deals where we're revenue neutral positive, negative. They're going to be deals where revenues may come down but earnings will stay the same because we have entered into a opt in type of arrangement and therefore revenue may come down, incentives come down as well. Clearly our goal is we want to be at a better place with the airlines, but also within that context that I just described, as you can imagine we're having a lot of discussions, we're working a number of different models with the airlines to determine what is going to work best. More largely for the market place and I think the thing that is important to keep in mind here is what works for one may not work as well for another and that's why we will have different deals out there. That's about all I'm willing to say on that one, Paul.

Okay, But the public planning assumption in terms of what you think the right return capital of that business is the maintain neutral economics per booking is that correct.

Yeah, I think that's right.

And the second question is more housekeeping on the Travelocity. Roughly, what were second quarter year-to date EBITDA losses in Europe.

I don't think we have any comments on that Paul.

No, okay. I thought you weren't going to ask us to repeat ourselves. It's a historical questions. Okay. It's four numbers. But does that division become EPITDA positive at all as a business last minute?

We have no comments on that. I really appreciate how, how much people want to know about Europe and we are looking forward to providing that just as soon as we reconcile last minute numbers on a GAAP basis and further blow out our synergy plans, and of course, the impact of the dollar strengthening.

My number is almost $30 million, just so you know.

That's good because we're going into planning session after this.

My last question, I promise. You're gross bookings you gave 30% growth in North America, what was that number on the core Travelocity site, if you exclude out the wheel winds of market share gains you've had on the private label side.

We haven't -- We don't break that out as you know but Continental which was the one we announced this quarter just launched in July, so that wouldn't have been included in our second quarter numbers and so, we just feel terrific about the health of our domestic business, lots more to do, lots of opportunity ahead but Travelocity in particular is very strong and we just continue to be very pleased that we're actually down year over year on a media spend basis and yet seeing such robust growth numbers.

I have seen two or three good wins are you doing it on price or on something else to gain those contracts?

Think about it the same great logic that applied to why I believe we have a better hotel product in offering so for instance, better technology with our supplier partners that led to things like being able to show smoking rooms versus nonsmoking rooms. That led IHG to say they wanted to do a deal with us. So those are the kinds of things we think are fueling the numbers like 41% growth and room nights on our site and the same logic applies when somebody like Contennintal, or American Express, or AARP is looking at what can they offer their consumers they like tobe able to say we connect directly in their hotels we are going to make sure their reservation is there. They're consumers can pick whether it's a smoking room or a non-smoking room, there consumers can have access to Intercontinental Hotels, so I think it's the same investments we made, as we said many times we weren't the first to market, we missed the boat, we had to do things better .

We appreciate your comments, Paul. We have gone well over time and we really appreciate all the questions from everyone. We also look forward to spending more time with you over the coming weeks and more importantly having the opportunity here in a couple of months to provide a great deal more detail as it relates to Lastminute.com. By then we will have, I imagine, even already made progress with a number of the synergy efforts that we have underway there and again as we've stated before we already feel really good about the work integration planning work that's already been done.

So we look forward to talking to you more over the coming weeks and months and appreciate your participation in the call. And thank you, Mr. Gilliland, and our host panel. Ladies and gentlemen your host is making today's conference available for digitime for two weeks. And that does conclude our earnings call for this second quarter 2005. Thank you for your participation as well for using ATT executive teleconference service. You may now disconnect.