Sabre Corp (SABR) 2005 Q4 法說會逐字稿

Good morning from North America. Welcome to the Sabre Holdings' fourth quarter earnings Conference Call. In just a moment, we will go right to the Sabre Holdings executive team for their fourth quarter overview, but first, I would like to cover just a few housekeeping items.

Namely, at this point, we do have all of your phone lines muted, or in a listen-only mode. After Management's prepared remarks, we will enter into a Q-and-A session.

[OPERATOR INSTRUCTIONS]

As a reminder, today’s call is being recorded.

With that being said, we'll get right to today's agenda. Here with our opening remarks is Sabre Holdings’ Vice President of Investor Relations, Ms. Karen Fugate. Happy New Year, Ms. Fugate, and please go ahead.

Thank you, [Brent]. Hello, everyone. Thank you for joining us today.

I'm here with Sam Gilliland, our CEO, Jeff Jackson, our Chief Financial Officer, Tom Klein, President of our Travel Network and Airline Solutions businesses, and Michelle Peluso, CEO, Travelocity.

Sam will review highlights for the year. Jeff will review our financial results. Tom will discuss the Travel Network and Airline Solutions businesses, 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 revenue, 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 factors section of the Company's most recent form 10-Q filing with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliations of our adjusted items and non-GAAP financial measures in our earnings press release and on our website.

Now I'll turn the call over to Sam.

Good morning, everyone, and thanks for joining us.

I'll kick things off with a few thoughts on 2005 and our latest quarter before I hand it off to the rest of the team.

Let's start with Airline Solutions, where we celebrated the fifth quarter in a row of solid earnings growth with full-year operating income growing by $25 million and margin increasing by nine points. New contracts in the fourth quarter, contracts with Southwest, Japan Airlines, Kingfisher in India, set the stage for continued strength at Airline Solutions, and even though the fourth quarter of 2004 was a turn-around quarter for the business, our fourth quarter of '05 still showed solid growth.

At Travel Network, we rely less on air revenue to sustain our margins than we did a year ago, and we continue our cost focus. Of course, air is still our primary revenue generator, and as Tom will discuss in a few minutes, both airlines and travel agents continue to see Sabre Travel Network as a great marketplace for business.

But we also continue to find new and better ways to serve hotels through smarter merchandising across Travel Network and Travelocity, and it's helping our non-air business take off. At Travelocity, we continue our strong growth trajectory with operations in the fourth quarter yielding 28% revenue growth in North America. I know I'm stealing some of Michelle's thunder here, but I want to mention that this was the eighth quarter in a row at Travelocity where the revenue growth rate was greater than 25%.

There was also great execution. Our lastminute.com integration continued apace. We saw advances in our Travelocity and lastminute.com brands, strong growth at Travelocity Partner Network, and a great start to the new year. Bottom line, this past quarter, and this past year, we met the goals we set for ourselves, we did what we said we would do, and as we look ahead, we continue to be bullish that the work we did in 2005, will pay off in 2006, and beyond.

Finally, I want to mention that earlier this week, we announced an increase to the quarterly cash dividend, raising it from $0.09 to $0.10 a share, and we're pleased to continue to enhance shareholder returns in this way.

Before we get into the business units for more detail, I will turn it over to Jeff for the financials.

Thank you, Sam.

This morning, I will cover our results for total Company and by business unit as well as reiterate our 2006 outlook, and I will start with total company results for the quarter.

Our fourth quarter performance was operationally strong in every business unit and led the way to a great start for 2006. Our total Company revenue in the fourth quarter was 620 million, 25% greater than last year. Our growth was driven by all three business units, but principally by Travelocity.

Total Company operating income and margin on an adjusted basis was 25 million, a 4% margin, and on a GAAP basis, seven million, a 1% margin. We had several exceptional items, which negatively impacted our operating income and adjusted EBITDA. These items totaled approximately 17 million or $0.09 of EPS and fall into three general categories -- first, acceleration of lastminute.com integration, including expenses to transition off of Worldspan technology and severance charges across the Company, with these two items totaling approximately nine million; disposal of certain assets of three million, including a software write-off associated with upgrading to a new platform in Travelocity business; and other miscellaneous items of approximately five million.

In addition to these items, incentive expense for Travel Network spiked in the fourth quarter due to unexpected timing of certain payments in December. The good news is that our full-year incentive costs were in line with our expected growth in the high single-digits, and the growth in December is not reflective of a long-term trend.

Diluted earnings per share on an adjusted basis were $0.22, this includes a positive impact due to a reversal of accrued income taxes of $20 million, or $0.15, as well as the impact of the exceptional items I mentioned a moment ago. Diluted earnings per share on a GAAP basis were $0.09.

Now moving to full-year results for total Company.

Revenue growth was over 18%, totaling 2.4 billion versus prior year of 2.1 billion. Adjusted operating income was 306 million with an operating margin of 12%, and on a GAAP basis, operating income was 261 million with an operating margin of 10%. Diluted earnings per share on an adjusted basis were $1.50, and $1.32 on a GAAP basis. Adjusted EBITDA was 392 million and GAAP net income was 172 million.

Free cash flow was 134 million, with cash flow from operations of 226 million. Free cash flow came in lower than our previous guidance due to the timing of a pension plan contribution.

Before I move to business unit full-year results, I would like to make a few comments about Travelocity's fourth quarter. First and foremost, global performance metrics and operating results were quite strong. We did report that Travelocity had an adjusted operating loss of 11 million in the fourth quarter. This loss was the result of eight million of the 17 million total Company exceptional charges that I mentioned earlier, as well as the accelerated consolidation of ZUJI for four million. The GAAP operating loss was 24 million.

In spite of these items, fourth quarter adjusted operating income from North America was 11 million with an operating margin of 7%, and on a GAAP basis, was nine million with a operating margin of 6%. And most importantly, in Europe, we continue to track to the forecast we issued in September with anticipated dilution in the fourth quarter and $0.03 to $0.05 of accretion in 2006.

Now turning to full-year results by business unit, all of our business units met the revenue and operating income goals we laid out at the beginning of the year. Travelocity had a great year and executed on all key metrics. Global gross travel booked for the year totaled 7.4 billion, 51% growth over 2004. North America gross travel booked was 6.2 billion, robust growth of 28%, far exceeding the industry average. Europe gross travel booked was 1.2 billion.

Travelocity had total global revenue of 830 million and reached our growth projection of 65%. North America revenue grew 23% to 633 million, and revenue from Europe was 197 million.

As expected, Travelocity more than doubled operating income to 27 million with a 3% operating margin on an adjusted basis, and a loss of three million on a GAAP basis. Breaking that down regionally, North America grew operating income over 50% to 59 million with an operating margin of over 9% on an adjusted basis, and 52 million with an 8% operating margin on a GAAP basis. Europe had an operating loss of 32 million on an adjusted basis and $55 million loss on a GAAP basis. Most of this loss is due to Travelocity Europe losses in the first half of the year prior to the lastminute.com acquisition.

Adjusted EBITDA was 48 million. North America was 75 million EBITDA, offset by a negative 27 million in Europe. For Travel Network, revenue for the year was 1.6 billion, growth of 4%, with total transaction growth of 4%, both metrics in line with our expectations.

In hotels, we had healthy 27% revenue growth, thanks to strong organic growth, merchandising efforts, and the addition of SynXis. Together, car and hotel revenue at Travel Network grew 20%.

Operating income for the year on an adjusted basis was 241 million with an operating margin of 15%, and on a GAAP basis, 224 million, with an operating margin of 14%. Adjusted EBITDA was 228 million.

Airline Solutions had a tremendous year with revenue of 261 million, growth of 7%, and more than doubled operating income. Adjusted operating income grew by over 25 million to reach 41 million, with an operating margin of 16%, more than nine points better than last year. GAAP operating income was 39 million with a margin of 15%. Adjusted EBITDA ended the year at 60 million.

Turning now to 2006, I remain very confident in the 2006 projections we provided in December. Our total Company revenue for 2006 is projected to grow approximately 15%, approaching the $3 billion mark, and adjusted earnings per share is expected to be greater than $1.70 for year-over-year growth of approximately 15%. GAAP earnings per share are anticipated to be greater than $1.20. We expect to more than double our 2005 free cash flow to approximately 300 million with cash flow from operations of 450 million -- 415 million.

For the first quarter projections, we anticipate revenue in the range of 680 million to 710 million, and earnings per share of $0.21 to $0.25 on an adjusted basis, and $0.10 to $0.14 on a GAAP basis. It's important to note that with the additional of lastminute.com, the seasonality of our earnings has shifted and will be significantly different than 2005. This new seasonality will put pressure on first quarter earnings with a corresponding positive impact in the back half of the year.

In particular, Travelocity will lose approximately 8 to 10 million more in the first quarter than last year. North America earnings grow, but ZUJI consolidation and lastminute.com seasonality pulls down the quarter. lastminute.com bookings and cash flow growth will be significant in the first quarter, but due to seasonal patterns in Europe, a large portion of these bookings will be recognized as revenue in subsequent quarters. So a profile develops where Travelocity second quarter earnings will more than triple with continued high year-over-year growth rates in the back half of the year.

Now, I will wrap up with full-year outlook by business unit, which remains unchanged from our outlook call in December, and I will start with Travelocity.

We expect 2006 global revenue to approach 1.2 billion, growth of more than 40%. North America is anticipated to approach 20% growth, with Europe contributing between 440 and 460 million of revenue, over 100% growth. Operating margin for global Travelocity is expected to approach 10% on an adjusted basis, with GAAP operating margin in the mid-single digits.

North America operating margin, including the consolidation of ZUJI, is anticipated to be in the low double-digits on an adjusted basis, and approximately 10% on a GAAP basis. The European operations’ adjusted operating margin is projected to be in the mid-single digits, with an operating loss on a GAAP basis. Adjusted EBITDA is also expected to triple to over 155 million. GAAP operating income is expected to be approximately 55 million.

Turning to Sabre Travel Network, revenue in this business is expected to be 1.6 billion with strong cash flows and a slightly improved operating margin in the mid-teens. Adjusted EBITDA is anticipated to be over 320 million, with GAAP operating income of approximately 240 million.

And finally, moving on to Airline Solutions. We believe revenue growth will be in the low-single digits and expect a healthy operating margin in the mid-teens. We also expect adjusted EBITDA of greater than 60 million with GAAP operating income of approximately 35 million.

Now, I would like to turn it over to Tom.

Thank you, Jeff, and good morning, everyone.

Before I get started, let me correct one number from Jeff's comments. Travel Network adjusted EBITDA was 282 million rather than 228 million.

2005 was a good year for our business. Throughout the year, we used our position as the industry's most efficient marketplace to extend our leadership and bring clarity to how travel will be distributed in the years to come, and you will see us continue that in 2006. We believe this will be a year of noise and news. Noise from others, but you can also expect to hear substantial news from us this year. We'll strike new deals with travel agencies and suppliers, and we will launch new innovations for the industry, and the work we do will serve to stabilize and strengthen our business in the travel industry overall.

In 2005, both Sabre Travel Network and Sabre Airline Solutions delivered sound financial performance, and launched new services to which our customers responded favorably. The Travel Network's performance was solid, and the business is poised to continue to deliver consistent earnings stream and cash flow. Travel Network also retained its number one position in the global marketplace and grew share while continuing to lead the industry in bookings from global travel agencies.

In our Airline Solutions business, we completed a second consecutive year of double-digit sales growth with 188 million of total contract value sold in 2005, and the trend here is the key. This represents 24% growth over 2004 sales, and 61% growth over 2003. Our products and services help airlines market, sell, serve, and operate better, and we expect demand for these products and services to remain strong.

Looking more closely at our Travel Network business, its core strength is the efficient marketplace that brings together travel buyers and sellers around the globe on a greater scale than anyone else. All parties in the travel marketplace benefit from the reach and the immediacy of marketing through Sabre.

In the fourth quarter last year, we made news when the industry named Sabre the world's best GDS, at the World Travel Awards in London for a record twelfth consecutive year, and all of our current customers understand the value of our network. For example, in the past year, we have launched new products that drive revenue and reduce costs for hoteliers, rewarding them with the best return on their distribution and marketing spend.

We also competed well with all comers, and while we welcome any innovation that helps our industry -- that helps make our industry better, we feel confident that we will continue to provide the most robust distribution for travel suppliers, and we'll continue to improve and strengthen this business. We'll grow content for agencies and consumers, and points of sale for suppliers, and we'll enhance our value to all with innovative products, services, and technologies.

Let me turn to the airlines for a moment. We're pleased to have made some headlines with our long-term, full content agreements with three U.S. carriers to date. The two most recent being our agreement last week with Northwest Airlines and today's announcement with US Airways, the fifth largest U.S. carrier, that is the result of the recent merger of US Airways and low-cost carrier, America West.

Obviously, we're pleased to have reached these latest two agreements. Northwest and US Airways are progressive. They think hard about distribution issues and have often come up with ideas about how to best market and distribute their products, and while we have had our disagreements from time to time, it's encouraging that we have arrived at a good place together. And building upon our agreement with low-cost carrier AirTran Airways last October, our business model, and the value it provides, is being validated where it matters most, in the marketplace.

We've gotten great feedback from corporations and travel agents who do not want to return to the inefficiencies of a fragmented marketplace. They don't want to step that [gaze] backwards. Airlines, despite some of the public positioning, want access to valuable customers, and they need to have these customer serviced effectively, and that's the value of the efficient marketplace we provide. We have also been busy around the globe signing new agreements with over 250 airlines that include full-content provisions as part of our normal annual contract cycle.

Now, let me expand on our hotel business. Our full year growth in 2005 was 27%. These revenues represent about 9% of our travel network revenue, and we expect the hotel segment to continue to grow in importance for us. This growth came in part thanks to innovative marketing services like SabreSurround and HotelSpotlight, plus the addition of SynXis to our portfolio. Spotlight and Surround enable hotels to promote directly to travel agents at the point the sale is being conducted. Sabre travel agents can better represent the hotel services and attributes for their customers. These are very powerful marketing services for hotels, and they bring hotels more business and higher daily spend from consumers.

This year, we'll also launch a new consumer offering for travel agents called TripTailor, which builds upon the expertise Travelocity has developed with its Total Trip dynamic packaging platform. So while we remain focused on keeping the airline side of our business in order, we're also executing against an aggressive plan to improve and grow other lines of business and be the partner of choice for travel agents.

Growing our breath of agency customers is also vital to the health of our efficient marketplace. No other company handles the needs of large multinational travel agencies better than we do. It's been a strong segment for us for many years. Our goal is to have the same strength with the global online business.

Our mantra on the cost side of the ledger is to ensure our costs reflect our scale advantage. We're already realizing savings through a program of initiatives. For example, we know that last quarter, we made meaningful unit cost reductions in data processing. This is not a one time focus. It's a sustained march to consistently drive costs down, and while we reduced the rate of growth of incentives over the last several years, they continue to grow faster than revenue, and that's not a sustainable trend for any business. We are determined to do better. Our goal is to run this business maintaining margins in the mid-teens.

In closing, I'm extremely confident about the prospects and the future of our business. We're using our leadership position to drive positive changes in the marketplace and within our own Company, to create long-term strength and stability.

Thank you, and now I'll turn it over to Michelle.

Thanks, Tom.

2005 was a breakthrough year overall for Travelocity. We outpaced industry revenue and growth -- sales growth by a significant margin. We doubled operating income with room for significant continued expansion in 2006. We continued to take share from our competitors, and we expanded our reach globally.

In fourth quarter, in particular, top line revenue growth continued to be strong. We recorded our eighth straight quarter of greater than 25% revenue growth, and total year-over-year revenue growth came in at 86%, and a very healthy 28% in North America with gross travel booked in North America up 31%. This quarter marked the highest top-line North American growth rates we have seen all year.

Our success in our North American business continues to be driven by our focus on the fundamentals and execution on our key growth channels. We continue to see payoff from our differentiation strategy, namely the Travelocity Guarantee and our Customer Championship platform. As we have said for some time, competitive pricing is just a ticket to play in our industry, not a source of differentiation, and we never lose sight of that fact. Customer Championship is a profound form of differentiation, and you will see us take it to the next level in 2006.

In the fourth quarter, we launched our activities tab, further enhancing our role as a provider of complete travel experiences. Along those lines we have also been executing on our strategy to enhance our role in key destinations.

Finally, we continue to achieve significantly improved marketing effectiveness. In North America, we grew revenue at 2.5 times the rate of marketing spend in 2005. We also saw a very impressive improvement in all of our brand metrics, positioning us well for 2006. Turning to our newer channels, our distribution businesses have been a very robust growth channel for us, fueled by growth at Worldchoice Travel and our partnerships with American Express, AARP, Continental, and others.

In 2005, our Travelocity Partner Network business grew at over 300% year-over-year, and we recently launched our latest relationships with Northwest Airlines, to power the cruise section on their website, and with US Airways to power hotels on their site. With respect to our portal partnerships, Travelocity.com is growing significantly faster than our portal relationships. In fact, in the fourth quarter, while total revenue grew at 28% in North America, revenue, excluding AOL and Yahoo, grew at 36%.

On the corporate side, GetThere continues to grow at a robust clip. The total value of travel purchased via GetThere surpassed 6.3 billion in 2005, a 31% increase year-over-year, and in January, we hit a single-day record of 85,000 bookings versus our 2005 record of 69,000 bookings. Travelocity business landed Toys”R”Us, among other accounts, and now supports Discovery Communications' UK offices.

Across all of these businesses, we continue to not only accelerate top-line growth, but also look for sensible ways to drive costs out. Two key areas of focus for us in 2006 are call center efficiency and credit card merchant fees. On the credit card front, we're aggressively looking at opportunities to reduce our high transaction costs, including alternate forms of payment.

Turning to Europe, our European operations registered solid growth in the fourth quarter with year-over-year pro forma gross travel booked growth in the 10% range on a local currency basis. As we've discussed, our strategy in Europe is to manage our Travelocity Europe business and our trade business for profitability. That means, we will no longer invest aggressively in the Travelocity Europe brand, and we will exit those parts of the combined business that we do not feel have long-term strategic value.

At the same time, we will focus on both revenue growth and bottom-line profitability in the core lastminute.com business. This focus is reflected in the numbers as well, if we disaggregate the 10% growth figure for Europe overall, gross travel booked for the lastminute.com brand grew at over 30% in the fourth quarter, and encouragingly, our early read on gross travel bookings growth in January is slightly ahead of our plan, particularly in the area of hotels where we are seeing continued impressive growth.

On the integration front, the team is doing a very good job in driving the core integration activities well ahead of our expectations. To lay out just a few accomplishments on the integration side, we're consolidating three major UK facilities into one, we sold our stake in the German J.V. we had with Otto, streamlining our operations in Germany. We have consolidated our technology and operations in the UK, France, and Scandinavia.

We merged the corporate travel assets from lastminute.com with Travelocity Business, offering a more global solution to our multinational corporate customers. We launched Travelocity merchant hotels throughout Europe, improving overall hotel sales nicely. We continued to consolidate call centers across Europe to improve efficiency and reduce costs, and we have taken many steps at lastminute.com and the companies it had acquired to deal with Sarbanes-Oxley compliance, and we anticipate tightening controls in a number of areas.

Moving to Asia, while not technically a fourth quarter 2005 event, we announced the completion of our ZUJI buy-out on January 24. We have worked closely with ZUJI since its launch in 2002, both as an investor and as a technology provider, and we have great confidence in the management team.

Integrating ZUJI will be a relatively simple task. ZUJI runs on Travelocity technology and uses many shared processes already. The ZUJI buy-in is the next step in our strategy of turning Asia into a large and profitable growth driver for Travelocity.

As you can see, across each of our businesses, we had a fantastic 2005, and we're off to an encouraging start in 2006. In order to more than triple our operating income in 2006, and approach a 10% margin on an adjusted basis, we'll stay very focused on continuing our path of differentiation in the North American marketplace, investing wisely in our newer growth channels to help fuel the next generation of profits for Travelocity, integrating lastminute.com successfully, and achieving our growth targets in Europe, and bringing ZUJI more fully into the fold in order to accelerate our growth in Asia. And, of course, underlying it all, we have been thought leaders in the industry on how to craft mutually beneficial supplier relationships, and we intend to keep our obsessive focus about being suppliers’ preferred partner of choice now on a global basis.

With that, I'll turn it over to Sam.

Thanks, Michelle.

As we said in our outlook call in December, our strategy for 2006 remains much the same as in '05. You will see us continue to extract benefits from our scale, growing our network with new agency partners and full participation from suppliers. We'll grow globally, keeping our strong core in North America, but seeking growth in Europe and Asia. We'll reap the benefits from higher margin retail and merchandising initiatives, and we'll continue to use technology leadership to our advantage.

Clearly, we have a lot of hard work ahead of us in '06, but this team has demonstrated it's more than up to the challenge. We'll demonstrate that again this year by more than doubling free cash flow to approximately $300 million, adjusted EBITDA of greater than $500 million, growth north of 25%, revenue approaching $3 billion, and earnings per share of greater than $1.70 on an adjusted basis. So, we're excited about our successes in 2005 and our prospects for growth in 2006 and beyond.

And with that, let's go to Q-and-A.

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First in queue, we go to the line of Jim Kissane representing Bear, Stearns.

Please go ahead.

Yes, thanks.

Sam, or Tom, can you provide a little more color on the new GDS deals? I think originally, your goal was to be revenue neutral then it was profit neutral. So how are these deals turning out relative to your goals?

Well, I'll start it off, and Tom can certainly jump in.

I think, in terms of the goals we've set, they're consistent with those goals. Clearly, as you've heard us talk about 2006, we're talking about slightly improved margins in the Travel Network business, and the deals that we have struck are consistent with the goals that we've set forth.

So I don't think really anything has changed in terms of our intentions there. These are -- and I might just provide a little more insight on the deals themselves -- although as you’ll recall, I've said we won't provide a lot of economic or financial detail on these deals. This most recent one announced today was again a five-year deal, full content. There are certainly some aspects of their websites, in each case, that Travelocity is powering with its own content, so you probably saw that, but the rest of these deals -- the rest of the aspects of these deals, components to these deals -- are confidential, and so, we won't talk in a lot of detail about the financials.

Jim, I would also note that two of the three deals that -- the AirTran deal and then the America West portion of the US Airways deal -- we didn't have full content with either one of those airlines before, so there is opportunity for growth with both carriers, and I suspect that is going to continue to be a trend in the market.

Okay.

And then, just for Michelle, based on the fourth quarter revenue and the first quarter guidance, it seems like lastminute, from the outside maybe, underperforming relative to your expectations -- can you provide a little insight, maybe give us the apples-to-apples growth rate for lastminute?

Sure, Jim, and let me talk about fourth quarter in particular. We have made a conscious decision to accelerate some of the synergies, and particularly, with our Travelocity Europe brand and some of the other businesses that lastminute.com was in, to manage more towards profitability and the bottom line, rather than revenue growth, so if you disaggregate the fourth quarter numbers on a gross travel booked basis, I told you Europe was approximately 10% in a local currency basis.

The lastminute.com brand grew at over 30%. So, we certainly think that is keeping track with the marketplace in Europe, and I imagine you will see us do the same things going into 2006 -- real focus on the bottom line, particularly in those non-core assets, and a focus on both revenue and bottom line improvement in the core consumer brand of lastminute.com.

I apologize, just one question for Jeff.

Jeff, any update on your plans for refinancing the $800 million bridge?

Yes, just a little bit of an update from what I described in the fall and in December. We do expect to begin the process on the financing probably by the end of the first quarter. Some -- so, that will be underway by the end of the first quarter.

Some of the funds for the bridge -- to refinance it -- will come from internal funds, some will come from refinancing in the public and private markets. We're continuing to look at debt and equity-like securities, and so we haven't made our final judgments there, and we'll be subject to market conditions, but at these levels, we'd prefer not to issue equity.

Great.

Thanks, Jeff.

And thank you very much, sir.

Next, we go to the line of Jeff Kessler representing Lehman Brothers.

Thank you.

A couple questions -- first off, in the release, you noted that ZUJI is the leading travel agency in its region. On what metrics are you basing that, and who do you regard as the major comps to ZUJI?

Sir, ZUJI is one of the very few agencies that really operate in multiple countries across Asia, so it really is one of the few pan-Asian, online travel brands. It also won an award just recently, from the industry, the TPG award, for best online travel site in ZUJI, which we were excited about -- best online travel site in Asia.

In terms of our competitors, there are certainly the typical ones you’d expect, Cendant and Expedia, and the like, and then there are a host of regional competitors, and, of course, we're always looking at the competitiveness of airline websites as well, when we think about overall ZUJI performance. ZUJI had a great year in 2005, growing at I guess north of 80%, and we're excited to have it fully in the fold now in 2006.

Michelle, you also mentioned that you -- just in passing -- hopefully -- that you're intending somehow to get away from credit card payments. That's intriguing. What form of payment are you proposing?

Sure. We're actually looking at a lot of different options, and we're certainly not the first in the retail industry to think hard about fees. Online players, in general, pay more than offline players. I just think there’s a real opportunity. We're talking to a lot of leading companies in the alternate payment space, and we think there might be some possibilities.

Okay.

With regard -- if I could re-hash an old issue that keeps coming up, but perhaps you could talk about the relationship currently between Worldspan, Expedia, and Sabre, and how that is developing with you, your relationship with Expedia?

I think probably the best thing there is to rely on the views that Expedia would provide to you I think more directly. Certainly, what we have heard, and this is from some trade publications, we've heard that there is an intention on Expedia's part to begin moving bookings our way in the summer timeframe, but again, they'd be best to ask about that.

Final question -- you gave a couple of organic growth metrics. I'm wondering if you could elaborate on that a little bit?

Which part?

Well, I'm giving you an open forum here to give us as many as you can.

I will start with Travelocity, and then turn it over.

On the North American business we grew a very robust 28% in the quarter, and 31% in gross travel booked, and that is our highest revenue growth quarter for North America this year. So we’re certainly very encouraged by the continued trajectory. As a matter of fact, by our numbers, if you look at year-to-date for the third quarter -- and again, our competitors haven't announced -- we have almost doubled their rate of gross travel booked growth for the year, which we think is strong and certainly positions us well for 2006.

And what about the Travel Network?

Well, on the Travel Network side, I mentioned the 27% growth in hotel, and this is an area where I believe we have a bigger base of business to start from than anybody else in the industry, and we're building on that base, and we continue to expect to see double-digit growth rates in hotel, and also, an expansion of the services that we provide to hoteliers. So, I think that we're very bullish about our hotel growth.

Okay.

And can gross bookings for the whole division be considered organic?

Yes.

Yes.

Okay.

And I think that is all the questions I have now.

Thank you.

Thanks, Jeff.

And we thank you, Mr. Kessler.

Next, we go to the line of Justin Post representing Merrill Lynch.

Please go ahead.

Hi.

First question, can you clarify the charges and the tax benefit in the fourth quarter -- you went through it pretty quickly -- the EPD net revenue -- sorry, the net expense impact and the net EPS impact for the positive and the negative?

Yes. I'll go back through that.

Let me start with the expense side. What I illuminated were $17 million and $0.09 of EPS of exceptional items. There are really three categories -- $9 million in the category that was acceleration of integration expenses at lastminute, including a charge that we took in the quarter that will transition us off of using Worldspan; then, we had a second category of 3 million, which was principally a software write-off as we're well along on an upgrade of the platform at Travelocity Business; and the last one was just a miscellaneous category, 5 million. I didn't say this, but there was a two-year-old Abacus balance sheet write-off, for example, in there, things of that nature.

That totals 17 million, and then, the tax, which, of course, is in the federal tax line, was 20 million, and those are the items that I laid out.

The tax was $0.15?

Yes.

And beyond that, I think you should just do the further calculations if you’re interested.

Okay. Great.

And then can you talk about the guidance for lastminute? Obviously, a little bit different than the street was thinking as far as your quarterly EPS numbers. Can you talk about how the bookings are recorded in lastminute, and when you record the revenues and the profitability?

Yes.

It's really -- we record the bookings and the revenue the same way we do in domestic Travelocity. It's just that the travel patterns and the mix of product is a little bit different. So, there is a lot more things bought early, and a lot more things, which are non-air and vacation, so they're bought early, they’re consumed much later in the year, typically in the summer, in the second and third quarter.

That's really, in a simple description, the reason this has happened. So, that's why, in my remarks, I mentioned we have and will see a significant bookings growth and cash flow growth, but the revenue will hit more in the second and third quarter. And naturally, because of the leverage, it's a very dramatic impact on year-over-year operating earnings for lastminute and Travelocity in the second and third quarter. So you're going to see some really, really large year-over-year earnings growth rates that I enumerated in the second, third, and fourth quarter for Travelocity, and thus, the whole Company.

And, Justin, just to give you a real simple example, in Europe, over 80% of our revenue comes from non-air. As you know, we book effectively -- book the revenue for air when the booking is made. So in North America, we have a much more air-weighted business, and so hence, as people are booking packages in Europe in January, for instance, that revenue tends to continue over the summer months.

Okay. Great.

And then, could you help us a little bit on the Travelocity bookings numbers? First, it looks like you have a little net revenue decline because revenues grew a little bit slower than bookings, although your hotel metrics look really solid, so maybe elaborate a little bit on that? And then, on the Travelocity bookings, can you give us -- it's a really strong growth rate -- any detail on what is being contributed from say White Label or corporate? Is there any of that being -- helping out your growth rate there?

Let me start with the first one.

Actually, it's a fairly good story in terms of gross travel booked being up 31% in revenue and North America being up 28%. As a matter of fact, we have been working very hard with our carrier partners to try to improve yield as a way to add more value, and our yield for airline tickets is up 8% in the fourth quarter versus an industry average of about 4%. That's roughly $25 a ticket, which accounts for the entire difference between gross travel booked and revenue.

So, it's certainly a focus for us to try to continue to improve yield where we can, on behalf of our partners.

In terms of your second question was on -- I think -- if you disaggregate some of the corporate and partner networks, how did growth look?

I will say, and I will go back to what I said, if you actually take out AOL and Yahoo, growth went from 28%, goes all the way up to 36%. So the North America business is incredibly strong.

Of course, Travelocity Partner Network continues to play its part, had a nice solid growth year, and corporate had a nice solid year as well, but the core Travelocity.com business is extremely healthy.

And then, Sam, if you want to comment at all, on market share of GDS? I don't know if you got to that in your comments, but how is that trending?

We had a slight improvement as we got to the end of the year, so, year-to-date, slight improvement in share on a global basis.

Thank you.

And thank you very much, sir.

Representing Morgan Stanley, we go to the line now of Chris Gutek for our next question. Please go ahead.

Thanks.

Michelle, I have got a series of related questions on lastminute, and some integration issues of lastminute. It sounds like there are significant costs for the integration in Q4 and, as well, in Q1. To what extent is that just purely an acceleration of costs you had expected to incur as opposed to those costs trending above what you originally budgeted?

And related to that, what exactly -- what activities are you accelerating, and why are you doing that?

Most of it is an acceleration of charges, and just to give you a few examples, we decided to consolidate Travelocity Europe technology and lastminute technology in the UK, France, and Scandinavia, ahead of our initial expectations. So we did take some technology costs, for instance, to do that.

We also announced the closing of a couple of our UK offices faster than we had anticipated, so we're taking some of those charges for severance and consolidation, as you would expect, and then finally, we're working faster than we had anticipated at transitioning off of some of our other GDS partners to Sabre, and so, there is that piece as well.

I think we will return to our expectations in 2006.

I think the other thing I would say is that, as it relates to the overall deal model that we had built for lastminute.com, we are tracking very, very closely to it. We feel very good about the progress versus that plan.

That's in particular the $0.03 to $0.05 accretion we had laid out there for 2006. We continue to be confident in that number.

And really, if you go even further and go back to what we talked more about in the fall, we have really a two-year integration plan here, and in 2007, in the 15% growth that we talked about in December for 2007 for the total Company, a lot of that is driven by getting a lot of the expenses that you referred to, Chris, finished, a lot of the financial work, a lot of the controls work is going to be ongoing through 2006. That will conclude over time, and that's a big driver of our growth in 2007, for both Travelocity and for TSG.

Sounds like you’re pretty happy with the progress. Are there any challenges that caught you by surprise, or by contrast, are you actually very confident that it's smooth sailing going forward?

Well, there are always challenges in certainly, a big integration, but I think the teams are doing a fantastic job at going after the areas we laid out as core, while at the same time, keeping their eye very firmly on the revenue growth story, particularly, for the consumer of the lastminute.com brand, and not losing any grounds on revenue growth.

So I think that's right. We mentioned that we anticipate we will be tightening controls across the business, both at the core lastminute.com business, which really was the result of a bunch of acquisitions, so we're going company-by-company, and making sure we have the proper financial controls in place.

Just to repeat, it's been fairly gratifying so far, because there have been tons of challenges and really not many surprises, and so, if that keeps up, we'll be really pleased.

On the GDS contract renewals, you guys are making pretty good progress here, it seems like. Are you fairly far down the curve with all the airlines or, by contrast, with some of the airlines that have made a bit more noise about wanting greater cost reductions, or price reductions? Do you think it will take a few more months before you get those airlines signed up?

I guess I would -- apologies here on this one, Chris -- I'm not going to provide a ton of insight for you.

I think the bottom line is we're in productive discussions with the airlines that you would expect we would be talking to at this point, and we're tracking -- we're tracking pretty closely to where we wanted to be.

When we were talking about this really over the course of the back-half of last year, we said we expected we would get deals done either in the very late part of '05 and early into '06, and that's what we're doing, and we continue to work through negotiations with a number of other carriers. So good productive discussions, and we'll just continue pushing forward.

The other thing I would just say, Chris, is that we're being patient. I think we're interested in getting to a good place with each of these airlines, that they feel good about the model that we're pushing forward. Obviously, we want to feel good about that as well, but so far, so good.

Okay.

And finally, a quick one for Jeff.

Jeff, I might have missed this, but what were the gain on sale for the European asset and the $15 million supplier settlements? What were those issues?

Anything that we want to say or elaborate on, is in the reconciliations, which is attached to the press release.

But in terms of that supplier settlement, it’s $15 million -- ?

We're not commenting specifically about the number of the supplier settlement or in Europe.

Okay. All right.

Thanks.

And thank you very much, Mr. Gutek.

A question now from Michael Millman representing Soleil Securities.

Please go ahead.

Thank you.

Just following on what you just said and then going forward, how much is the integration cost in '06 that will be completed and not affect the '07 numbers?

Integration, obviously, takes a long time. What Jeff mentioned before is we're working very hard to try to get as much of the integration costs out of the way as soon as possible, so we can continue to reap the benefits of the higher margin growing business, and beyond that, it's hard to comment on what percentages in '06 versus '07, but our job is to nail the numbers in '06, and that's our intention.

Can you give us a ballpark? Are we talking about 10 million, or 100 million?

We haven't broken that out, Michael.

As you know, though, we did give you a raw guidance in our outlook call for what we expect for 2006 and 2007, and we still feel confident in those numbers.

You may recall, Michael, that we talked about EBITDA margins north of 20% in '07 for the full Travelocity P&L.

Okay.

You mentioned, I think, that your -- on Travelocity, that your ticket -- air ticket yield was up 8% to $25. Some of your -- Expedia and Priceline talked about how their ticket revenues have been dropping.

Yes, so there is a difference between ticket yield and ticket revenue, just to be clear.

So, ticket yield is the price that we actually sell, or I should say, the price that we sell an air ticket for went up by $25 for Travelocity, which we think is much faster than the industry average, from the data we have. Our average -- what we make, the revenue we make off an air ticket, our competitors have talked about sizeable compression in the past few quarters, and we haven't -- we really haven't seen that same kind of significant downward trend. Certainly -- certainly, the air carriers are working closely with us to make sure that we continue to provide value, and one of those ways for us has to be how do we improve yields for them and how do we improve the average ticket sold, and give them incremental value in that way. So, we're working hard on it.

Just to be clear on that, Michael, so when we were talking about yield, in this case, when Michelle was commenting on yield in this case, that is a contribution to growth and in growth sales for the airlines. So it’s using airline vernacular to talk about yield, and therefore, the overall ticket price.

And on this ticket price, is this the mixture of corporate and leisure? Can you break those out?

Sure, it's a mixture of corporate and leisure inasmuch as Travelocity Business is in our numbers, but as you know, Travelocity Business is still a very portion of our overall -- our overall revenue, and so, the vast, vast majority of that is leisure.

On your gross bookings, it sounds like you attribute your doubling the industry average to your consumer relationship initiatives. Could you give us some other metrics, namely, conversion rates or repeat customers, to sort of bolster [multiple speakers]?

I think it's a bunch of things, Michael. I think, first and foremost, we have great pricing, that's foundational. Some industry studies suggest we have better pricing than our competitors. That's a ticket to play.

Secondly, we have overhauled a lot of our products. I think we have got strong products across the board. We implemented new flight paths, for instance, we've seen a nice improvement there.

Third, we certainly believe firmly in Customer Championship, and I think some of the statistics I would point to is satisfaction for callers who call our call centers and know about the guarantee is more than 20% higher than those who don't. So, we certainly think that we're driving more satisfaction with our customers by having a guarantee out there, and frankly, by changing so many of our underlying business processes to be a more quality organization.

And then fourth and very critically, our marketing effectiveness is fantastic. We grew revenue in North America 2.5 times the rate of marketing spend. So, I think we're doing a good job at driving our marketing spend to the right channels and getting the right return on investment.

And then, finally, of course, supplier relationships, we continue to be really, thought leaders in how do we craft mutually beneficial relationships, and we expect that will continue to pay dividends. I think all of those come together to point to why we're growing at double the rate of our competitors.

Can you give us any metrics on conversions?

Yes.

Conversion's really hard, and as I have been a critic, in the past, of some of the third-party media metrics and the like in terms of visitor sessions, it's really hard, Michael, because not all traffic is the same. Even, for instance, we're much happier to sell one total trip, than we are to sell one air plus one hotel, which would strengthen your conversion if you sell two things, but we prefer, from a revenue perspective and a customer experience perspective, to sell total trip.

So we really have gone away from measuring ourselves on conversion. We measure ourselves a lot on year-over-year, and we're encouraged by the improvements.

And finally, on the TDS deals, can you tell us on these five-year deals, are they fixed for five years, or is there a lot of flexibility how the end years work?

And secondly, have you crafted these deals in such a way that it will be very difficult for other GDSs to sign on to the same deal without being significantly disadvantaged?

Mike, we're not going to comment on the terms of the individual deals. We'll just say that we are crafting them in a way that we think suits our Company very well, and obviously, the fact that people are signing up says it suits the airlines as well.

And I think the other piece of it is that we've included the anticipated impact of these deals in our '06 and '07 projections. So, that's really all the more color that we'll provide there.

I think the other thing I have said on past calls is that we're interested in a healthy GDS industry and healthy competitors, so we think that's a good thing, and that might give you an indicator in terms of any way we're structuring these deals.

And thank you, Mr. Millman.

Now, our next question we go to the line of Jake Fuller representing Thomas Weisel.

Please go ahead.

Hi, guys.

You had mentioned, Jeff, a spike in incentive fees for the fourth quarter. Can you give me a little detail as to how that works? I guess you pay agencies' incentive fees based on an estimated volume, if they beat that volume, you have a true-up payment. Is that potentially what that is?

That is accurate for a certain segment of our agencies, and I think that, Jake, you have hit on a decent explanation for a good part of what the spike was. There are many -- there are, in fact, many different kinds of calculation methodologies, and so I don't want to go into every single one -- put you all to sleep -- but I do think that that kind of thing is what drove the spike, or most of the spike, in the fourth quarter.

Did you give a quantification of how big that spike was above and beyond sort of the normalized fees?

No. No, we didn't. I would just say that and -- that spike and the other items that I’d laid out, really do go to explain the vast majority of any variance in the quarter.

But that spike wasn't included in your other category, which was 5 million?

That's correct. It was not.

Okay.

And then, you talked a whole lot about the DCA, or the new contracts, what about the non-DCA pricing? Is there anything you can talk about, an average increase for non-DCAs, anything like that?

No, Jake, but as I said, we've gone out with -- we have over 250 carriers signed up for their 2006 pricing, and that's part of an annual contract renewal process, and the difference in those contracts from what we had done in the past is that they include full-content provisions, and they are 12-month contracts, as opposed to the standard GDS contracts, which, historically, has been 30-day out.

And those contracts are now effective for the new year?

They have been effective, yes. They've been effective since January 1.

Can you say if overall pricing was up or down, even if you can't quantify?

It went up.

Okay.

And then, outside of the airlines, things like hotels, any non-air fees, are those up or down?

Expect them to be up across the other categories.

And as you look at your total reported volume, what percentage of that volume is non-air?

Have we talked about that?

15%.

Okay. Got it.

And then, Michelle, on the -- you guys gave for the first time -- I think it was the first time -- your room night numbers. Can you give us a sense of what the breakout is in that between merchant and agent?

No, we don't do those break-outs, Jake, but thanks for asking.

We have such different businesses with Worldchoice Travel, for instance, which tends to be more published, packaging, which tends to be 100% merchant, and stand-alone, which is a mixture of both. We will say that, in general, we are seeing increases in merchant mix.

And can you give any sense of international versus U.S. in the hotel side?

We're not going to break that out, Jake, but we did see very robust growth on both the European and the North America business in hotel room nights, effective growth on both sides.

Great.

Thank you very much.

And thank you, Mr. Fuller.

And our final question today, we go to the line of Scott Devitt representing Stifel Nicolaus.

Please go ahead.

Thanks.

Two questions -- first, Michelle, I was wondering if you could talk about lastminute in detail, related to trends in that business with packaging tours unbundled and online, off-line, just a little more granularity as to what is occurring in Europe with the business?

And then, Jeff, the free cash flow numbers, I was wondering if you could quantify the pension plan contribution, and then also talk to the difference in the cash taxes that you paid in the quarter versus what you were originally estimating, and how that may have impacted your full-year free cash flow.

Thanks.

Sure, Scott.

On the lastminute.com side, or the European side overall, and I expect this to be similar trends with our competitors. We are seeing solid air growth. We are seeing very strong hotel growth. We're seeing nice dynamic packaging growth. lastminute.com, unlike some of our competitors, has a traditional, kind of prepackaged, holiday business and that has not grown. We have actually seen that struggling a bit, and I think that is potentially consistent with some other tour providers, but we are seeing strong growth in those products. We effectively make and manufacture ourselves, hotels, and then dynamic packaging in particular, and solid growth in air.

Your first question was on the free cash flow situation and the pension. I guess what I will say without being too specific on the number because -- because we generally don't talk about that, but the pension contribution was the principal amount of the shortfall versus what we had said to you earlier, or late in the fall -- earlier -- but the reason for it, and the reason for it being somewhat unexpected is because we made a number of changes in assumptions. Our pension plan is very healthy, very well-funded, but there were just a number of changes in assumptions that we made, and we just thought it would be prudent to put the money in.

The tax situation was non-cash, and we had a sense that there would be -- that because of the way the accounting works and the statutory of limitations, that there would be -- that we would have a reversal, but we were very unsure as to the amount. In any case, it was non-cash.

Thanks, and congratulations on the two GDS signings, by the way.

Thank you very much.

And thank you, Mr. Devitt.

Well, with that, Mr. Gilliland, I will turn the call back to you for any closing remarks.

Just want to thank everybody for joining the call, and we look forward to catching up with you in person here sometime over the next couple of months.

Thanks, everybody.

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