Sabre Corp (SABR) 2005 Q3 法說會逐字稿

Welcome to the Sabre Holdings third-quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, today's conference is being recorded for replay purposes and that information will be announced at the conclusion of our call. So with that being said, let's get right to today's agenda. Here with our opening remarks is Vice President of Investor Relations for Sabre Holdings, Ms. Karen Fugate. Please go ahead, ma'am.

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

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

Thank you, Karen and thanks everybody for joining us. Our third-quarter results were excellent. With a healthy operating margin for the Company and with solid profitability and growth at all three business units. At Travelocity we had strong operating income, strong growth in our domestic business, and we made significant progress integrating lastminute.com into the Company.

At our airline solutions business we reaped the benefits of our turnaround there for the fourth quarter in a row. And at SabreTravel Network we increased both revenues and volumes while making progress in key expense categories. These businesses all performed well on their own but as I'll explain later they are also performing well together.

First, though, let's take a look at some of the highlights for each business. At Travelocity we continue to see excellent revenue growth and share gains, thanks to our progress with differentiation, a thriving merchant program, marketing effectiveness and a growing distribution business. It was our seventh quarter in a row with revenue growth greater than 25%. In the six months since Travelocity announced its differentiation strategy, centered on customer championship, we've interacted with hundreds of thousands of customers through this program. Each time that happens, Travelocity's brand gets stronger.

Meanwhile, ever smarter media spending continued to give Travelocity greater marketing effectiveness. New features such as multiple room booking and the total trip savings calculator are helping boost merchant revenue. And Travelocity Partner Network, which redistributes content through third-party sites continued its success by adding Continental Airlines and more recently AirTran Airways to its growing list of affiliates. Finally, since our call in September, we've continued to make very good progress integrating lastminute.com into Travelocity, Michelle will touch on all of this in a few minutes.

At our Sabre Airlines Solutions business our performance continues to be impressive. Our operating income nearly quadrupled year-over-year to $11 million and we had strong growth in all areas of the unit. In particular, we saw a success in key growth segments, China, the Middle East, and India. As an example we provided a number of new products, including our SabreSonic web check-in tool and our airline e-ticketing hub to Jet Airways, the fastest growing airline in India.

At Sabre Travel Network we saw transaction and revenue improvements and we reduced cost growth in key areas. Our 8% increase in international transactions was driven in particular by new relationships in Latin America and the Middle East. In Hotels, we had a 33% revenue jump, thanks to strong organic growth, merchandising efforts, hotel spotlight and Sabre Surround and through SynXis. Together current hotel revenue at Travel Network grew 25%. On the cost side we slowed the growth of agency incentives and data processing. Results driven by several initiatives in recent years. Focused on incentive costs and building cost effective open systems technology. We also implemented new policies that stop those who use other technologies from tapping into our services without paying for them.

We continued our work with the largest U.S. carriers on long-term distribution agreements and those talks are encouraging and productive. Regardless of what you might hear otherwise, these airlines have made it clear to us that the GDS channel is an important part of their distribution plans going forward. We continue to focus our efforts on reaching long-term full content agreements that enable our agency customers to provide the broadest range of services to travelers and corporations. We will use our leadership position and our global reach to find collaborative solutions that can be adopted by airlines and travel agents alike. We continue to be patient, because we want our -- want to reach agreements that will deliver excellent and unique value to all of our customers. That value proposition was validated last month when we announced a comprehensive distribution agreement with AirTran Airways a low cost carrier. It's a five year deal with good economic terms. It gives all of our agencies full content on AirTran, the same goes for Travelocity, plus it grows the Travelocity Partner Network which will redistribute hotel rooms, cruises, and packages through AirTran's website. And it provides a great illustration of the strength of our offering across the portfolio. With this new agreement, we can now serve our agency customers and consumers even better than before, all while delivering more to AirTran.

Our businesses are working together like this all over the world at hotel groups, cruise lines, and airlines. It puts us in a unique position deliver more for our agency customers and for consumers. That in turn provides scale for suppliers everywhere and all of it ultimately benefits our shareholders. So this quarter we focused on our strategic initiatives through the successful execution of our plans and will continue that focus moving forward. Finally, I want to mention that earlier this week we announced our quarterly dividend at $0.09 per share, 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. Jeff.

Thanks, Sam. This morning I will cover our third quarter results, followed by fourth quarter and full year outlook and I'll start with consolidated results. Total company revenue was 700 million, growth of 29% including the addition of lastminute.com on July 20. Revenue growth excluding lastminute.com was 20 -- or 10%. Total company operating income in margin on an adjusted basis was 112 million, a 16% margin, and on a GAAP basis operating income was 100 million, a 14% margin. Total company adjusted EBITDA was 138 million, and GAAP net income was 58 million. Adjusted net income was 65 million. Earnings per share excluding adjusting items was $0.50 compared to $0.41 in the year-ago quarter. Earnings per share on a GAAP basis were $0.45 compared to $0.49 in the year-ago quarter, which last year included an accrued tax reversal of 18 million. Free cash flow was 62 million, and cash provided by operating activities was 84 million.

Now moving to business unit performance for the third quarter, starting with Sabre Travel Network. Revenue was 403 million, year-over-year growth of 4%. Total transactions also grew 4%. Operating income for the quarter on an adjusted basis was 59 million, a margin of 15%, and on a GAAP basis was 56 million, a margin of 14%. Our margin is in line with our expectations and we are on track to meet our full-year goal of mid-teens. We continue to invest for the long term in emerging retail initiatives, while at the same time looking for opportunities to take out costs to maintain mid-teen margins for the long term.

We've seen progress this year in reducing the rate of growth in two important expense categories. Incentives and data processing. On the offline incentive per booking front year-over-year growth is in the mid-single digits, about half of 2004's run rate. In data processing, we are realizing savings on a per transaction basis, as a result of moving 100% of North American agency customers to lower cost open systems. Adjusted EBITDA for Travel Network was 70 million.

Moving to Sabre AIrline Solutions third quarter results, revenue was 67 million, an increase of 11%. Operating income on an adjusted basis was 11 million, a 16% margin, and 10 million on a GAAP basis, a 15% margin. Adjusted EBITDA for the Airline Solutions business was 16 million.

Now moving on to Travelocity. Before I get to the financials, I want to highlight a couple of reporting changes starting this quarter. First, lastminute.com is included in our financial metrics, starting on July 20. Second, we will provide a geographic breakout of Travelocity's results in two categories, Europe and North America. Our Asian joint venture Zuji will be included in the North America results for the time being. We will consider breaking out Asia when it becomes a larger portion of our business. And as a reminder, our joint ventures such as Zuji are accounted for under the equity method and any equity income or loss is reported in revenue.

So with that let's get to results starting with gross travel booked. Total gross travel booked for the quarter including lastminute.com was approximately 2.1 billion, growth of 76%, and without lastminute.com growth of 34%. Breaking that down geographically, North America gross travel booked was 1.6 billion, robust growth of 30%. And European gross travel booked was 564 million.

Moving on to Travelocity revenue. Total global revenue in the quarter was 276 million, growth of 98%. Excluding lastminute.com, which contributed revenue of 100 million, revenue growth was over 26%, and without a one-time catch up of 7 million reported in the year-ago quarter, revenue growth would have been a very strong 32%.

Breaking revenue down geographically, North America revenue was 169 million, growth of 17%, and again without the one-time catch up in the third quarter of 2004, growth would have been 23%. Revenue from our European operations was 107 million. Breaking down global revenue even further, stand-alone air revenue grew 40% while non-air revenue grew over 130%. Packaging and hotel revenue continued to drive transaction revenue. Global packaging revenue grew 120%, in total global room nights sold across the Travelocity network were 4.6 million, growth of 94%.

Travelocity operating results were strong in every respect. Total global adjusted operating income was 43 million, with a margin of 15%, and 31 million on a GAAP basis, with a margin of 11%. North America ended the quarter with a very nice operating income of 27 million, 16% margin on an adjusted basis, and 25 million with a margin of 15% on a GAAP basis. Our European business was also profitable and ended the quarter with adjusted operating income of 16 million with a margin of 15% and GAAP operating income of 6 million, and a margin of 6%. And lastly Travelocity generated adjusted EBITDA of 50 million, growth of over 250%. 31 million of adjusted EBITDA for North America, growth of over 70%, and 19 million for Europe.

Before I get to outlook I'd like to comment on our recently announced agreement with low cost carrier AirTran. As Sam mentioned earlier we signed a five year agreement for both Travel Network and Travelocity with AirTran. We expect this deal to be accretive to our consolidated earnings and even more accretive longer term if their volumes continue to grow at their current pace. This agreement is a good example of how we can leverage our broad Sabreassets to strike deals with airlines. It is our goal based on continued improvements in our cost structure and leveraging all assets in the Sabre portfolio that the economics of these new airline contracts will be neutral to earnings over a multiyear period.

Now turning to total company outlook for the fourth quarter. For the fourth quarter we expect total company revenue to be in the range of 619 to 638 million. Adjusted EBITDA is anticipated to be approximately 75 million, with GAAP net income of 12 million, and adjusted net income of 23 million. We expect earnings per share excluding adjusting items to be in the range of $0.16 to $0.19 and on a GAAP basis to be in the range of $0.07 to $0.10. This EPS range includes the expected dilutive effect of the lastminute.com transaction of approximately $0.10 to $0.12 on an adjusted basis, and $0.17 to $0.19 on a GAAP basis. Primarily driven by the seasonality in the European business and acquisition and integration costs.

Now turning to full year outlook where many of our full year metrics have changed due to the addition of lastminute.com. Our full-year revenue growth is now approximately 18% year-over-year. On September 28, we refreshed our earnings per share guidance to reflect the addition of lastminute.com. We are maintaining that guidance and expect full year earnings per share of $1.45 to $1.50 on an adjusted basis and now expect GAAP earnings per share to be $1.31 to $1.36. The addition of lastminute.com changed our guidance assumptions for other key financial metrics, including total company adjusted EBITDA and free cash flow. We now expect total company adjusted EBITDA to be approximately 420 million, with GAAP net income of around 175 million versus our previous expectations of 390 million adjusted EBITDA and GAAP net income of 180 million.

Our cash flow from operations is expected to be approximately 235 million, and our free cash flow guidance is now approximately 150 million for the year, down from our previous guidance of approximately 200 million. This revision is driven by the timing of the close of the acquisition and the collection and sales cycle of lastminute.com merchant content. When we closed on July 20, lastminute.com had more in cash than we had anticipated. At that point, they had collected cash from customers from many of the trips to be consumed in the peak travel months of July and August. The reduction in free cash flow reflects the burn off of this previously collected cash. 2006, however, will be a very different story. We expect a significant increase from 2005's lastminute.com run rate of 200 million. This increase is driven largely from cash flow growth in Travelocity, both in North America and Europe. We will provide more detail on our 2006 outlook call in early December. Our capital expenditures for full year 2005 are projected to be 85 to 90 million, versus previous guidance of 90 to 100 million.

Turning to Travelocity's full year, we now expect Travelocity revenue growth to be greater than 65% versus our original projection of 25 to 30%. This increase is driven by robust growth in the domestic business, and the addition of lastminute.com. Operating income on an adjusted basis will be approximately 35 million and on a GAAP basis approximately 6 million. Adjusted EBITDA is now projected to be 60 million, almost doubling last year's level. Due to the seasonality of the European operations, we expect Travelocity Europe to have an operating loss in the fourth quarter while North America will be profitable. Overall total Travelocity expected to be approximately break even on adjusted basis and a loss on a GAAP basis. Our full-year revenue and operating margin assumptions for Travel Network and Airline Solutions remain on track with our original expectations. And now I'd like to turn it over to Michelle.

Thanks, Jeff. We have had another very strong quarter at Travelocity. We continue to focus on both the fundamentals in our core North American business and on the growth strategies that we have identified as key. And we are seeing solid traction on both fronts. We said that we would continue to register top-line growth at or above the pace of our competitors and we have done so again this quarter. We also said we would deliver improved earnings performance and I'm happy to report that we have achieved this goal again this quarter. As Jeff mentioned both our third quarter EBITDA and our third quarter operating margin are at historic highs.

In addition to the financial details that I'll walk you through I'll also outline how we will maintain the momentum that we have at Travelocity. We'll view this both through core business innovation that supports our differentiated customer championship positioning and through our focus on new growth segments. In the U.S. and globally.

Let's start with the financials. As Jeff mentioned, during the quarter total revenue including lastminute.com was up 98% versus prior year, to 276 million, on a base of gross travel booked of 2.1 billion or 76% growth year-over-year. And adjusted for the one time revenue catchup from the third quarter of 2004 and taking out lastminute.com, revenue is up a very strong 32%. Equally important, we delivered strong earnings improvement at Travelocity. Adjusted EBITDA, which we reported for the first time last quarter, came in at 50 million. Operating income was $43 million on an adjusted basis, and 31 million on a GAAP basis. And our adjusted operating margin was 15%. All of these numbers are record highs for Travelocity.

Driving this overall performance were strong results in hotel room night growth and packaging revenue. Total Travelocity hotel room nights sold were up 94% and total package revenue was up 120% year-over-year. Both packaging and hotel room nights were up significantly in our North American business. As a result of this growth, we believe that Travelocity has gained substantial share versus our on-line agency competitors in 2005. While these competitors have reported weakness in bookings and yield in North America this year, we simply haven't seen it. In fact, this year we registered one of our strongest North American growth rates in company history.

As we said last quarter, we have not achieved our share gains by outspending our competitors, but rather by a combination of smart spending and consumer differentiation. Last quarter I outlined four key paths that we are pursuing in our differentiation strategy. First, is our effort to drive deeper into the travel experience, here we've launched new capabilities to drive higher value sales. An example of this is our launch of multiple room booking functionality on the hotel and total trip tasks. The enhancement allows consumers to not only book up to four rooms in a single reservation but to mix and match different room types for each party in their group. We are also doing more with our partners to drive deeper into certain destinations. One example of this is our recent partner funded Las Vegas promotion where we introduced a ground presence by having our customers go directly to a Travelocity Show Tickets booth to pick up redeemable certificates for Las Vegas activities.

Second, we continue to make great strides in the personalization and relevance category. And here we have a shining example in Site59's introduction of the meet me in travel pool, a patent pending product that enables family and friends to easily connect by traveling from two different departure cities to a common destination for the convenient travel package and a calculation that allows them to maximize their time together. Also on the personalization front we have continued to roll out customized versions of our most popular CRM campaign and we're now bringing many of these to our website itself by providing more tailored offerings to consumers based on their origin city, their interests, and their recent shopping behavior, we're seeing sizeable improvements in click throughs and buy rates for these campaigns.

Third on the list is our improved brand advertising and the continued support of our Gnome campaign. The campaign won a 2005 EFFIE award one of the most coveted advertising awards in the industry alongside such other apples as Apple iPod, Campbell's Soup and Johnny Walker Scotch. The EFFIE is awarded not only for creative ingenuity but for documented business impact. And we think the proof points on our ad effectiveness are clear. Year-to-date we have seen North American revenue grow more than five times the rate of advertising spend growth. We also continue to see outstanding improvement in all of our key brand metrics, progress that began almost two years ago with the launch of the Gnome campaign and that continues to build.

Fourth and finally customer championship and the Travelocity guarantee remain central to our momentum and our differentiation. For us it's not about paying lip service to customer service, rather it's been about overhauling every aspect of our business, to deliver upon the promise that Travelocity will make sure you have the great trip you booked. And after almost two years of focused investment we're now seeing strong results. Customer satisfaction is on the rise, and we've just received two very prestigious awards for our work. Budget Travel's 2005 Extra Mile award, and Fast Company's second annual Customer First award. An award given by Fast Company for the 15 best customer centered companies across all industries.

Moving on to our key growth channels, Europe, Asia, the Travelocity Partner Network and Corporate. On the European front we finished the quarter in line with the expectations we communicated on our lastminute.com integration call on September 28. As we mentioned the quarter was impacted by currency movements and by the world events in London and Egypt. Having said that, we have seen encouraging transaction growth across Europe in October. Our hotel business has been particularly strong, we broke several all-time single-day hotel records during the month, helped in part by the strength of the new Travelocity merchant product, and an ACORE merchant relationship which launched on September 6.

Additionally we continue to make steady strides in our integration efforts. Last quarter, and again during our lastminute.com call, we detailed the specific actions we would undertake and the timelines associated with each. We have been executing on or ahead of schedule and can check the box on several important initiatives. U.S. merchant hotels have launched successfully on lastminute.com, we've lowered our advertising investment and significantly improved our customer acquisition costs on Travelocity.co.UK as we make the lastminute.com the lead brand across Europe, lastminute.com holidays were implemented on Travelocity.co.UK. We fully consolidated technical platforms and content in both France and Scandinavia using the best capabilities from each brand. And we rolled out lastminute.com in the U.S., using Site59 and WCT technology and content. We are very pleased with our progress towards synergy realization and with our integration timeline for lastminute.com.

In Asia, our Zuji business continues to gain traction and recognition. We are seeing strong growth in our merchant hotel sales powered by Travelocity and we're very pleased with the announcement that Zuji won best on-line travel agent in Asia at the 16th annual PTG travel awards. And as a reminder a put option exists which allows our airline partners to sell us the remaining stake in Zuji in the next quarter of next year.

At Travelocity Partner Network Travelocity's private label booking business we continue to see very robust growth, and we announced that we have been selected by AirTran and Continental to power portions of their websites. We are also seeing encouraging trends in our corporate businesses. GetThere signed renewals with several top customers representing $320 million in aggregate air travel spending. GetThere's corporate bookings in Europe are up 65% from the year-ago quarter, fortifying our leadership position in the international corporate on-line marketplace. The Department of Education signed with GetThere to become the 15th government agency using this system, positioning it as a leading on-line booking solution in the Federal sector. Travelocity business had several important wins during the quarter, and successfully rolled out major clients, including McKesson Corporation. We also announced a supplier deal with Hyatt for special corporate rates for Travelocity business travelers.

In summary, we are continuing our path of differentiation and share gain in the North American marketplace, driving more earnings in our business and meeting our plans in our growth arenas. All that appears it has been another very strong quarter for us at Travelocity and we are pleased that we have demonstrated that strength in the most tangible form possible, earnings. With that I'll turn it back to Sam.

Thanks, Michelle. Before we go to Q&A I'd just like to make a few summary comments. Three quarters of the way through the year it's clear that we've done what we said we would do. We have invested in global growth and retailing initiatives in the scale of our business and our technology strength. Our purchase of lastminute.com will create benefits for us in Europe and beyond, both in retail and in what we can offer through the travel agency channel. All the while we've maintained the scale that provides an efficient marketplace for suppliers, agencies, and travelers. So we remain on track and we will continue our work to stay on course for the remainder of the year and well into the future. We'll talk with you about our 2006 outlook on a call plan for early December, when we'll add our objectives for 2006 and how we plan to address the opportunities and challenges we see ahead. And with that, we'll go to Q&A.

Indeed. And thank you very much, Mr. Gilliland and our host panel for your update today. [OPERATOR INSTRUCTIONS] Representing Bear Stearns, our first question we go to the line of Jim Kissane. Please go ahead, sir.

Just a clarification. Jeff I think you said you want to work GDF deals that are neutral to earnings and I think you used to say you want to work GDF deals that are neutral to revenue. Has there been a change in the strategy?

No. I think what we've been talking about Jim over the last couple of quarters is how the deals themselves are all very different, -- different structures, different levels of progress with each of the airlines and in fact I think in the second quarter we talked about the possibility as there exists at certain places in the world of opt in models, that's just one example. There are many. The the AirTrans example shows that we can leverage the assets across our business and as a result, I just thought it was appropriate to describe them the way we did today.

Okay. And can you give the growth in total incentives? You gave the offline. And then can you elaborate on the factors enabling you to drive down the offline incentive growth?

I -- no. Well, we can't elaborate any more on incentives than we did on the call. I -- I think it's -- I think it's a variety of things and Sam or Tom Klein could chip in if they like. But it's our presence in the marketplace, it's a combination of our relationships, our service, and our content. And I just think that on balance -- and it has -- this has generally been the case for some time, that we're able to -- even in a very competitive marketplace with incentives, generally maintain or grow our share with a lower incentive rate than our competitors have to pay.

Yes. And I think -- just to add to that. We have continued to have a very disciplined -- disciplined focus on incentives. So we've talked about over the course of the last year, we have had an incentive program that we had in place for small and medium-sized agencies and that's been a successful effort or initiative. But we've been -- we just continued to apply discipline and I think the sales team's done a good job of winning new business, even in light of, again, pressures they get from a competitive perspective.

I think -- the flip side of that Jim is -- I think Sam has said in prior calls. Is incentives are important in how this marketplace works. And so we think it's important that the relationships continue the way they do in general, but take this disciplined approach to managing that cost line.

Yes. And any update on the Expedia bookings?

No. No update there. Probably be better to ask the folks at Expedia.

Got you. And then Jeff last question. Can you give us a pre lastminute cash flow? Are you still on track to do 200 million if it wasn't for lastminute?

Yes, yes.

Great. Thank you.

And thank you very much Mr. Kissane. Next in queue we go to the line of Chris Gutek, representing Morgan Stanley. Please go ahead.

Thanks, good morning.

Hey, Chris.

Hi, Sam. Just a follow-up on that last line of questioning a little bit here. I guess with the Sabre Travel Network bookings growth of 4%, I think that does include some GetThere bookings. Do you have a number that is just for the pure GDS business?

Just for the pure TN business?

Yes, the TN business.

The bookings business. No. We now measure transaction growth because there are so many different types of transactions as opposed to specifically TN bookings or the traditional TN bookings. So no, we don't have a number for that.

And do you have any updated thoughts on the new entrants and then other forms to the channel just specifically to prior websites I know you said that the airlines have spent a lot of commitment to using TS just going forward but just any updated thoughts there on the channel shift and what that -- what that quantitative impact is on the bookings growth?

Well, first of all I did say that we have continued to see channel shift at levels consistent with what we've -- what we've said really over the past 12 months or so. So no dramatic change there, although I know we've heard from at least one of our competitors they believe that's the case. It's not something that we've seen. And I guess secondly, the -- on the new entrants, we haven't seen a lot of progress there. We're paying close attention to it but we've not seen a lot of progress from them. Or heard a whole lot more. Even related to their pricing models. So there's still a fair amount I suppose that you'd say is unknown about them in the marketplace.

Michelle, a question for you. I guess the merchant hotel inventory supply constraints haven't been as much of an issue for Travelocity as it has for some of the competitors but presumably there is some tightness there that you're feeling some negative impact from? Is that in fact true? And in fact could you put some color around how that might be getting a little bit worse?

Yes, let me debate the premise .We saw a strong room night growth of course globally but also in the North American marketplace. As a matter of fact our merchant mix in North America was up in the third quarter so we continue to believe that as a result of our supplier friendly model and our strong relationship, we have a better and more sustainable merchant model than some of our competitors. So we actually had -- we actually had a nice quarter in the -- -- across the board for our hotels particularly in the North American marketplace.

And presumably then the assumption is that you're still not expecting supply constraints over the medium term going forward?

No. There's nothing -- we don't believe that we're going to face significant supply constraints. Of course in the fourth quarter there's always seasonality in big markets like New York but that's just part and parcel of the hotel business that we've become used to over the past few years.

I think -- I would just add, we haven't seen any -- anything unusual in terms of that content availability. Besides what Michelle mentioned in terms of peak periods. So none of the tightness that I guess we've been hearing from others.

Okay. And finally Jeff, any updated thoughts on permanent financing for lastminute?

No. We now have -- we now have our 8-KA behind us and after today of course our earnings and so we're beginning to look -- so we're in a position to be able to refinance and I would say generally over the next couple of quarters we'll look at it. As I have said recently, we're looking at all range of refinancing alternatives, but with our stock price at current levels we're a little less inclined than we might otherwise to be to issue pure equity.

Great, thanks.

Thank you very much Mr. Gutek. Next we go to the line of Paul Keung with CIBC, please go ahead.

Thank you good morning.

Hey, Paul.

A couple questions. First, I was wondering what impact you think Wilma might have on your business particularly since I think it hit some of the key leisure markets in -- going into the holidays? And then second is on lastminute we saw a price onto a decent quarter, in Europe and Expedia has been doing the same thing. I was curious what you think about lastminute's market share, what disruptions your interaction might have and how long will it take to put lastminute back on track?

Okay, Pau. On the Wilma question -- this is Jeff, by the way, I will -- I think -- I think we've been -- we have seen a little bit more impact and Michelle can elaborate from Wilma than some of the other hurricane activity in the last three or four months and generally as a result we've been a little bit cautious in our fourth quarter forecast until we see how that slows through actual bookings.

And on the lastminute.com question, Paul, we as I mentioned, in earlier, the October transaction growth across Europe and in the U.K. for lastminute.com is very encouraging. So we have broken several hotel records and so we believe that strong growth is returning after what was a tougher third quarter for our European business.

Yes. I'm going to just comment on the hurricanes just a little bit more because there was some question about that in the third quarter and then there's a question about Wilma specifically and I think we did see some impact in the third quarter related to Katrina, and, yet, there was a lot of just movement, I guess you'd say dislocation movement of people that might have otherwise gone to those areas that decided instead to vacation in other places. So clearly in-bound traffic was moving other places, you would lose some of the outbound clearly because there was no outbound but the strength of the overall business overcame any issues that we might have seen from those two hurricanes. Or those several hurricanes.

The -- with Wilma it's a little bit different because of course it hit some very significant leisure destinations, Mexico and Southern Florida and that's why -- that's why we're still looking at it to understand what kind of impact it might have. Now, again, clearly, you would expect that if somebody was planning a vacation in Mexico, they might well vacation somewhere else instead. But the question is, and I think over the -- over the longer term, it would be a fairly smooth situation, but over the very near term we may see some impacts and that's I think we've factored that into our fourth quarter numbers.

One easier -- one similar question if I may on -- one on Travelocity's marketing spend. Clearly you're spending the marketing dollars a little bit smarter and better as you said. Can you give us a little context as to how you're shifting your spend between general offline, on-line and specifically your on-line budget, how have you changed the way you spend your on-line dollars to sort of strengthen those four key strategies you outlined earlier Michelle?

Yes, we actually are shifting money away from on-line towards offline and that's partially because I think we believe firmly that it's -- we've got some great ROI vehicles offline to tell the brand that's in those four key points I talked about earlier and we just have more and more confidence that we can tell a more robust message in a very cost effective manner with some of our offline channels. And so we have been moving money more from on-line towards the offline channel and then we've just gotten much tougher in how we evaluate ROI in our search spend in particular to make sure that, while it's a great vehicle, we want to make sure it's truly incremental and so we're taking a harder look at that than ever before.

Thanks.

Okay. And thank you very much, Mr. Keung. Next in queue we go to the line of Justin Post, representing Merrill Lynch. Please go ahead.

A few questions. First on your prepared remarks I think you indicated that revenues in North America were up 23% at Travelocity, the release says bookings were up 30%. We were kind of thinking revenues would be in line with bookings. Could you talk about the net revenue rate and are merchant hotels still growing faster than the average.

Sure. And let me just clarify exactly what we said. We said that if you take out lastminute.com and adjust for the $7 million catchup we reported in revenue in the third quarter of 2004, revenue growth was 32%, which is very much in line with where our gross bookings growth was. So we do continue to see hotels and packaging and those businesses outgrowing traditional air bookings as you might imagine. And as I mentioned, in the merchant mix in the third quarter in our North American business was actually up, so if you take out, again lastminute.com, and adjust for the one-time, you would have seen 32% revenue growth. If you just look at North America, that number would would have been 26%.

Great. Thank you. That's a good clarification. Secondly on margins on the Sabre Travel Network down year-over-year, is that just due to industry cost pressures that are sustainable? Are you really making a big investment that you could pull back on next year if necessary?

Well, we have -- clearly we've been investing for the long term in the TN business and you see that impact because the core TN business has been performing really quite well and the margins have been very consistent. But our -- we are investing in merchandising, we're investing in new businesses there and that does drive some drag on the overall margins. However, it does also deliver things like I mentioned during the more formal part of this call here, 25% growth in car and hotel revenue at TN. Now, over the longer term, we should expect that we'd actually see these margins come back, but we clearly feel like it's important right now and for the foreseeable future to continue investing in that TN business.

Great. And then two things on sustainable of what I see are pretty good trends. First, are you able to continue to grow bookings in North America at 30%, continue to beat the industry, or are you coming across tougher comparisons? And secondly on the Airline Solution business, very nice margin improvement year-over-year, does that have any more room to grow there?

Well, on the North American front in Travelocity we continue to believe that our -- the momentum is sustainable particularly the kind of championship platform that we're building on. Of course as we get into next year there will be tougher comparisons because we -- our North American business performed so strongly this year but we will keep plugging away at the things that we think differentiate us. The great supplier model, good pricing, fantastic marketing effectiveness and all built on a platform of customer championship and we do think that's different than -- and sustainably different than what our competitors are doing.

And then just in terms of forecasts for the Airline Solutions business, I'd say that we're pretty pleased with where the margins are now. And we'd like to sustain those for the longer term. The challenge will be that we're operating in -- that business is operating in an environment where spending is down, particularly in the U.S. market. The good news is we're seeing lots of growth on a global basis and we're seeing lots of growth in terms of passengers boarded which drives a large part of the Airline Solutions business, the reservations or what we call SabreSonic part of that business. So I think we feel quite good about the growth in that business even in a fairly difficult environment. But, we're going to -- we're going to work to sustain the margins that we see there today.

So just basically the business should grow in line with revenues looking out to next year potentially?

Yes.

I think that's right.

Yes.

Thank you, I appreciate it.

Okay. And thank you very much, Mr. Post. The next, Cathay Financial, Steve Velgot.

Yes, a few questions. Have you made any announcements concerning potential head count reductions, especially in connection with the lastminute.com acquisition?

On lastminute.com side, part of our integration we talked about doing a couple things. One is consolidating offices and secondly is bringing our G&A spend down as a percentage of total spend. We think there's room for both. We did announce some possible consolidations in the U.K. earlier this year. And we're working very diligently to make sure that we've got the right people in the right box. But on the G&A side one thing we talked about on our update on lastminute.com is we really want to reduce G&A spend after we do the right consolidation from a technical perspective to make things like hotel payments easier and the like. So we're making sure that we pursue it in a very -- in a very disciplined way.

Would you expect that maybe in the early December call we'd get more details, or would it just be an ongoing effort.

Absolutely. What you'll find -- you'll continue to hear from us, is progress as we track towards realizing the synergies that we talked about when we made the acquisition and we'll continue to be real transparent. The good news is we are ahead of schedule in most of the major areas. Things like rolling out merchant hotels, things like consolidating some offices. We are announcing the potential consolidation, things like ramping down brand spend for Travelocity.co.UK we'll continue to make sure we lay it out clearly how we're progressing towards synergy rationalization.

I think what you can expect is we'll lay out our progress and then we'll provide you with proof points over say the next quarter or so. Of our progress. And -- and where we intend to go in terms of that integration. And then we'll let you know as we get toward the end of that quarter how we've done versus that. I think we just -- we feel very good about our progress so far there though.

Okay. And Sam, do you have a particular time frame in mind or goal that you'd like to get another -- a major sort of BCA type contract signed by?

Well, of course we have our internal goals. I would expect that you'd see us making progress towards the end of this year or early next year. You're I'm sure aware of the timelines for the expiration of DC83 agreements and really those start in the -- I guess it's really the second quarter of next year, we start to see some of those deals expire. So we've set our internal goals. We -- I'm not here to make any commitments on that. We are being very, very patient to ensure that the types of deals that we strike with the airlines are -- obviously we want them to be good for them and particularly in the U.S. market where they're having a difficult time but also good for agents, for the travel agent's community.

And one last question. The AirTran deal that you signed, do you see any risk of this type of, I guess it would be the splintering of distribution with -- where Sabre or -- and/or Travelocity is left out of the distribution?

Well, I think, first of all I would just say I think we're in a very good position there in the sense that we do have the greatest distribution in the North American market. And therefore I think that places us in a good position. We also have a large percentage of corporations do their business through us. The majority of corporations do our business -- do their business through us. And so that puts us in a good position. I also would just say that even though we are seeing some of that splintering going on. If I were an airline I'd be participating in all of the GDSs. It's a very efficient channel. Now, I'm not an airline, but I am biased, I suppose. So -- but it -- that would be my view, that I think it's -- I think it is -- it's a very good place, high-yield place to distribute products. And I guess if I were stating a preference they'd be distributing through all GDSs. So while you might -- you might imagine that we're sitting back saying this is great, this -- all this has occurred with AirTran, we actually -- we'd like to -- we'd like to see these airlines distribute through all GDSs.

Thank you.

Thank you, Mr. Velgot. And next representing Soleil Securities our next question is from Michael Millman. Please go ahead.

Thank you. I'd like to ask a few but I'd like to just follow up on that last first. Which -- clearly AirTran transaction went against airlines using all GDSs, American has strongly indicated that they won't use all GDSs either. Can you talk about -- assuming that this -- that this trend continues, what consolidation presumably World Span seems to be the odd man out, what the consolidation might mean to you all?

Well, I mean I -- I'll comment on consolidation, I guess. I -- but less related to how the airlines are participating or strategizing. Those are really their strategies and their approaches, not mine. So again, they're better to ask those questions about how they think about these things. If I were to talk more broadly about consolidation, I think -- in any market you see consolidation, you see more discipline. And I think that ends up being a good thing. But I would talk about consolidation separate of what we've seen with any airline actions.

Okay. And in regard to -- could you tell us or give us a rough idea of how much of the Travelocity incentives come from Sabre?

All of the Travelocity incentives.

Almost all of it.

Yes, almost all. Almost all of them.

I -- misstated. What percentage of Travelocity's revenue comes from Sabre incentives?

Well, we won't -- we won't get into too much detail there. But we do have -- in the -- we have laid out that in the 10-Q and I think it's probably in the neighborhood of 30%.

That's -- that's what it seems. And in -- well, you haven't given any guidance, is there any supposition that in the attempt to be earnings neutral and reduce incentives that on-line travel agents might see any reduced incentives and what kind of effect that might have on Travelocity's incentives?

Well, we haven't seen any indication of that thus far in the marketplace. And we set the incentives, the inner company incentives at what we believe is market.

Switching, could you -- on the hotel room nights or hotel inventory that you have compare your third quarter with your second quarter, what kind of sequential growth are you seeing?

We didn't break out sequential growth if you're talking about Travelocity in particular, or the Sabre business.

I'm talking about Travelocity in particular.

Okay. We didn't break that out but what I will say is that room night growth just in North America, or, sorry, without lastminute.com, room night growth was up over 30%. So it was up in total for the quarter at 94%. And if you take out lastminute.com, it was still up north of 30%.

Could you compare -- that was up from the second quarter?

No. Sorry. It was up year-over-year.

Could you tell us what it was compared with second quarter?

We had a 40% roughly year-over-year growth last quarter -- the second quarter compared to the year prior. And again this is north of 30%. About 33% actually.

Well, that's hard on the percentages because we don't know what last year's was. We're just trying to--.

We haven't given -- we haven't broken out specific numbers. So it's up 40% roughly in Q2 and then again north of 30% in this quarter.

And the Internet travel, at least the numbers show that Travelocity was up about 10% and the industry was up about 16%. I guess the first question about that is are those numbers meaningful at all?

If you're talking about media metrics we've said over and over even comp score and the like that we don't believe those accurately reflect true performance and we've now demonstrated that, I don't know, six or seven quarters in a row where we have seen share gains versus our competitors. We're very -- I think smart about how we spend our money. And as a result, we're not out there trying to maximize visitor growth, we're out there trying to max customer acquisition and loyalty and revenue growth. And so we don't believe nor have we believed in a long time that media metrics and comp score and the like are an accurate reflection of true underlying performance.

Last question. Can you talk about your conversion rate?

Sure. We haven't given conversion rates in a long time at Travelocity as you know and that's partially because there's so much noise in the numbers with things like robots and even for instance as we move somebody from buying a stand-alone air ticket and/or potentially a stand-alone hotel that would have been two transactions historically if we now sell them a total trip that's one transaction so conversion goes down but obviously you're much better off from a revenue perspective. So we haven't broken out conversions. What I will say is that we are seeing more effective -- we are seeing conversion growth in our CRM campaigns so this is where we're really talking to consumers with tailored offerings based on their origin city, their shopping behavior, their interests, and we are seeing those campaigns, we're bringing some of them even directly to the website produce better results than we ever have.

And thank you Mr. Millman. Next representing Lehman Brothers we go to the line of Scott Schneeberger. Please go ahead, sir.

Good morning. I guess Michelle in your prepared remarks you had mentioned that obviously you've had some very strong bookings performance relative to peers and you mentioned that the marketing and advertising spend had been very reasonable for Travelocity to attain it. Could you just elaborate a little bit more? I guess what I'm looking at is how should we think about your marketing spend in future quarters?

Well, we don't give specific advertising expense on line item numbers and that's obviously for competitive reasons amongst other reasons. But we did see North America revenue grow at more than five times the rate of North America advertising spend. And I will mention that number is even artificially -- or it is suppressed by the fact that AOL and Yahoo! didn't grow at nearly the rates of dot.com for us, Travelocity.com. So we do think that we have got an effective marketing mix going on and we certainly do intend in our drive to continue to improve our margins. We do intend to not have advertising expense grow at the rate of revenue growth going forward in future quarters as well. We should mention that -- as we said earlier, that we are shifting -- we are finding some offline vehicles to have a great ROI and so we are moving some more of our money more towards offline vehicles.

Great. Thanks. And then I just have a broader question. With -- lastminute closed and what with Zuji coming up in a few months, any comments on that, the probability of you attaining more ownership? And then I guess a broader picture, the acquisition outlook or the strategy that you have going forward? If you could just restate that.

I'll let Jeff talk about the consolidation and I'll jump in on the strategies.

Thanks.

The situation with Zuji is as you know, they own a put option so they have the ability sometime in the first quarter to put the -- put it to us. It's a prenegotiated price. So that decision's entirely in their hands. The financial accounting decision is a little bit different and -- as they seek capital calls, we obviously intend to continue to fund, if our current partners choose not to and that could occur sometime in the fourth quarter if they choose not to then we would -- we would bring the entire asset under our balance sheet and have a minority interest. So that could occur in the fourth quarter.

In terms of the strategy we think it's great to be a global player and we're seeing that demonstrated even with our suppliers, so having the capability to be -- to drive, for instance, room night growth in Europe for IHG, is a really important part of our overall Intercontinental Hotel Group relationship. So we're pleased. We clearly -- we are pleased with North America results. We clearly have a lot of work to do to successfully integrate lastminute.com and we'll seek to do the exact same in Asia. And where we can share underlying technology, marketing, campaigns, and effectiveness, certainly global supply, we think that adds to the value proposition.

And I think -- I think actually with that, we are at the -- we are at the top of the hour and so I'll just emphasize how pleased we are with the performance of all of our businesses, in particular as compared to peers and we'll look forward to talking with you soon. We thank you all for your participation.

And thank you to our host panel and ladies and gentlemen, your host is making today's conference available for digitized replay. It's for two weeks starting at 12:30 p.m. central standard time November the 3rd all the way through 11:59 p.m. November the 17. To access AT&Ts executive replay service, please dial 800-475-6701 and at the voice prompt enter today's conference ID of 799747. And that does conclude our earnings call for this third quarter. Thank you very much for your participation. As well as for using AT&T's executive teleconference service. You may now disconnect.