Sabre Corp (SABR) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and good morning, welcome to the Sabre Holdings first quarter earnings conference call. [OPERATOR INSTRUCTIONS] So with that being said, we will get right to the first quarter agenda. Here with our opening remarks is Vice President of Investor Relations, Ms. Karen Fugate. Please go ahead ma'am.

Good morning everyone.. Thank you for joining us today. I am here with Sam Gilliland, our CEO, Jeff Jackson, our Chief Financial Officer, Tom Klein, President of Travel Network and Airline Solutions Businesses and Michelle Peluso, CEO of Travelocity. Before we get started, I would like to remind all of you, 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 factors section of the Company's most recent Form 10(K) filing with the SEC.

The Company undertakes no obligation to publicly update or revise any forward-looking statements. We have provided a detailed explanation and reconciliations of our adjusting items and non-GAAP financial measures in our earnings press release and on our Website. Now, I would like to turn the call over to Sam.

Thanks, Karen, good morning and thank you for joining us today. As always, we have a lot of ground to cover so I will get the ball rolling with a few brief remarks before handing it over to the rest of the team team. We came out of the gate with a solid first quarter and set a strong foundation for the rest of the year. We are on track both operationally and financially to meet our 2006 total Company guidance, finishing the quarter with earnings per share on the high-end of the range, and strong year over year revenue growth of 20%.

We also expect to exceed our full year cash flow expectations. In March, we completed a $400 million issuance of 10-year public notes. And earlier this week, we announced a quarterly dividend of $0.10 per share, payable May 25. Less than two weeks ago, we announced long-term full-content agreements with both Delta Airlines and United Airlines and we will talk about these deals more shortly. Together with the deals we signed in the first quarter with Northwest and U.S. Airways and late last year with AirTran, are well on our way to demonstrating the strength of our portfolio and our commitment to providing the best service and value for airlines, travel agents, corporations and consumers. And we had numerous successes across our businesses.

In addition to the airline agreements, Travel Network signed a long-term GDS agreement with Priceline.com, which means we now have relationships with three of the top four online agencies. Our acquisition of TRAMS in February was another step toward being the ultimate one stop shop for travel agencies, in this case for leisure focused agencies. Travel Network also saw substantial hotel revenue growth thanks to strong results from its marketing programs, as well as significant revenue growth in contract signings at SynXis. Not own is SynXis already contributing to our bottom line but its also strategically deepening our relationships with hoteliers. In Airline Solutions, there was nominal revenue growth year over year but we saw solid growth in the sales pipeline.

We've continued to expand our global footprint with healthy year over year sales growth in Asia Pacific, Latin America and EMEA. And contracts an our airline consulting business have tripled over the past several years. In March, we celebrated Travelocity's 10 year anniversary in online travel. The business produced sound numbers on a global basis during the first quarter, with strong performance in North America. In Europe we continue to be pleased with the integration of Last minute.com. And as Michele will explain, we are on track to reach our strategic goals.

Even in a relatively soft European marketplace, gross travel bookings were solid and at plan. And while overall operating income didn't meet our expectations, the core consumer business performed well. Overall, we are encouraged by Travelocity's strong performance. We will talk more about these successes in a moment but first I will hand it off to Jeff to discuss financials across the board.

Thank you, Sam. This morning I will cover our first quarter results for total Company and each business unit and then I will turn to outlook. Before I get to financial results, I would like to highlight the completion of our $800 million bridge facility refinancing. We elected not to use any form of equity but instead chose a combination of debt and cash.

The three steps in the refinancing were; an issuance of 400 million of 10-year senior unsecured notes. These notes will pay a coupon of 6.35% and are priced to yield 6.4. We drew 180 million from our revolver and made payments totaling 220 million out of existing cash. We are pleased that our credit ratings and our outlook remain unchanged. At quarter end, our cash and marketable securities did a 359 million and we had debt of 1.2 billion.

Now, moving to total Company results for the quarter. Total Company performance was solid. It was in our keeping us on track to achieve our full year expectation. Our total Company revenues in the first quarter was 700 million, robust growth of 20% over last year. Our growth was driven by all three business units but principally by domestic and international growth at Travelocity.

Total Company operating income and margin, on an adjusted basis, was 64 million, a 9% margin. And on a GAAP basis, 38 million, a 5% margin. Diluted earnings per share on an adjusted basis were $0.24, and $0.13 on a GAAP basis. As a reminder, we are excluding all stock compensation expense from our adjusted financials. However, it is included in our GAAP financials.

And starting this year, we discontinued our employee stock option program and implemented a performance based plan. This new program will provide certain employees the opportunity to receive shares of the Company's stock based on meeting or exceeding high thresholds for total shareholder return. Total Company free cash flow was 85 million, an increase of over 60 million from a year ago quarter, with cash flow from operations of 113 million. This increase is due primarily to the addition of Last minute.com and the growth in higher margin merchant businesses across Travelocity.

Now turning to results by business units, starting with Travelocity. Global gross travel booked for the quarter totaled 2.5 billion, strong growth of 59%. Europe gross travel booked was 668 million. And North America was, which includes Zuji was 1.9 billion, healthy growth of 24%. Travelocity had total global revenue of 234 million, growth of 59%. North America revenue grew 18% to 167 million. And revenue from Europe was 67 million.

Total transaction revenue growth was 64%, driven by growth of 90% in nonair transaction revenue. And North American transaction revenue growth was 21%. Travelocity had an operating loss of 17 million on an adjusted basis. Better than we expected due to strong North America performance and on a GAAP basis had a loss of 34 million. Breaking that down regionally, North America had operating income of 11 million, with an operating margin of over 6% on an adjusted basis.

On a GAAP basis, operating income was 8 million, a 5% operating margin. Europe had an operating loss of 28 million on an adjusted basis and 42 million on a GAAP basis. Travelocity's adjusted EBITDA was negative 9 million. North America was a positive 16 million with an EBITDA margin of 9%. Adjusted EBITDA for Europe was negative 25 million.

While we had planned on an operating loss in Europe for the quarter, it was more than we expected for a few reasons. First, the consumption curve for first quarter '06 gross travel booked was longer than we had anticipated. Second, advertising revenue in the quarter was light. And third, as part of our integration efforts, we exited a couple of noncore businesses, albeit sooner than we had planned. We exited these businesses to focus our efforts on the fast growing online travel market. I will talk more about the impact to Travelocity Europe financial outlook in a moment.

Now, turning to the Travel Network business. Revenue for the quarter was 449 million, growth of 7% with total transaction growth of 2%. Both in line with our expectations. In hotels we had revenue growth of 28%, thanks to strong organic growth growth, marketing programs and SynXis transaction growth. Operating income for the quarter on an adjusted basis was 76 million, with an operating margin of 17%. And on a GAAP basis was 68 million, with operating margin of 15%.

Adjusted EBITDA was 87 million, resulting in a 19% EBITDA margin. The online solutions business had a solid quarter with revenue of 65 million, growth of 3%. GAAP operating income was 5 million, for a 7% operating margin. Adjusted operating income was 7 million, with an operating margin of 10%, down several points from this time last year. This margin decline was anticipated due to the anniversary of several product sales from the year ago quarter. We continue to build a strong sales pipeline and believe we will reach our full year financial goals. Adjusted EBITDA ended the quarter at 11 million.

Before I turn the second quarter guidance, I want to make a few comments regarding full year outlook. As I mentioned previously, Travelocity's European business underperformed our expectations in Q1. While it's a bit early to tell, given the performance of the high traffic summer months, we've decided to do lower 2006 earnings and adjusted EBITDA estimates for Travelocity Europe. Based on the shortfall in the first quarter and on the travel patterns seen across the industry.

We now project adjusted operating margin for Travelocity Europe to be in the low single digits. And adjusted EBITDA of approximately 30 million, with a GAAP operating loss of approximately 35 million. All in all, we believe these are short-term challenges and part of the expected learning curve in acquiring and integrating a large business. We are confident in the strength of this business and the key fundamentals are strong.

Gross travel booked in the Last minute.com online brand and dynamic packaging both grew over 30% this quarter. Our efforts in Italy and Spain are paying off, with terrific growth in each of these countries. And most importantly, we expect improvement in adjusted EBITDA of approximately 55 million over last year. The change in Travelocity Europe estimates does not change our 2006 earnings per share assumption of double-digit growth at Sabre Holdings. And we remain within our guidance for total Travelocity, more than tripling operating income with adjusted operations margin approaching 10% and GAAP operating margin in the mid single digits. In fact, our total Company outlook for 2006 cash flow strengthened. With one quarter under our belt, we now expect free cash flow well in excess of 300 million. And cash flow from operations of greater than 425 million, with EBITDA of greater than 500 million.

Now, moving on to the second quarter projections for Sabre Holdings. For second quarter, we anticipate revenue in the range of 710 million to 740 million earnings per share of $0.38 to $0.43 on an adjusted basis and $0.25 to $0.30 on a GAAP basis. This guidance is influenced by seasonality of Travelocity Europe. As you'll recall, the seasonality puts pressure on the first half of the year with a corresponding positive impact in the back half of the year. To help put this in context, we expect total Travelocity's adjusted operating margin for the third quarter to be in the high teens and low teens margin in the fourth quarter.

Now, I would like to make a few comments about various aspects of our business. First, we are pleased with the outcome of the airline negotiations to date. The long-term nature of these contracts will provide strong and predictable cash flows in the Travel Network business for the foreseeable future. And the economics are within our expectation laid out in the December outlook call. The deals we are striking are healthy for the industry. They are cost efficient for the airlines, require us to continue our own cost reduction focus and drive an acceptable balance between long-term stability and efficiency and incentive reductions for travel agencies.

And finally, one last observation. There are lots of moving parts in each of our businesses. However, we remain on track to achieve our growth goals and earnings and cash flow in 2006 and beyond. And now, I would like to turn it over to Tom.

Thank you, Jeff, and good morning everyone. I would like to talk about how we are using the strength of our portfolio and our scale to strengthen and improve our Travel Network business and meet our objective to be the ultimate one stop shop for travel agents and the most effective marketplace for suppliers. As Sam has mentioned, several key building blocks have been put in place in the first quarter. Such as broadening our service offerings to travel agents and suppliers through the acquisition of TRAMS, strengthening our efficient marketplace with commitments from global online players like Priceline and signing long-term full-content deals with Northwest Airlines and U.S. Airways.

I'm pleased that our momentum with airlines continued into the second quarter, as evidenced by new long-term full-content agreements we signed with Delta Airlines and United Airlines two weeks ago. Corporations and travel agents have been very clear with us. Their number priority is to appreciate the efficiency they gain by using Sabre Systems to sell and service their customers. And to do that, they need assurance that they will have long-term access to airlines' full content. Today in fact, we have a large portion of the world's airlines signed up for full-content agreements. More than 275 carriers around the globe, including the five U.S. major carriers, plus carriers like Virgin Atlantic, KLM and SAS.

Airlines are challenged to increase revenue due to the punishing impact of fuel prices and they valued the broad efficient access to customers that Sabre provides. Especially those customers that require unique services and produce high yields. Sabre provides more access to that customer set than any other system. This reinforces the value of the Sabre Travel Network provides to travel suppliers and to the travel industry. In our discussions with airlines, we are focused on developing a balanced distribution model that works for everyone including travel agents and corporations. We've said all along the challenge is finding the right balance and we are being patient and determined to strike agreements that work for all parties.

In our discussion with major U.S. carriers we've focused on several assurances for travel agents and corporations including, long-term access to full content and protection from service fees and other charges. We've also made sure Sabre customers have equal access to financial compensation and other products and services offered by participants in the Sabre Travel Network. And we are ensuring agencies' freedom to choose the tools and technology they use and our flexibility to pay incentives where they drive value. Striking agreements that meet the needs of all constituents and bringing a value to all parties requires a holistic approach and that's our commitment.

And we will have a broad set of new opportunities and innovations for Sabre travel agents, including a specific program for access to full content. As we continue to strengthen our core and bring clarity to how travel will be distributed for years to come, we are also helping suppliers, travel agents and corporations improve their businesses and at the same time fuel our own growth and lower our costs. For example, we've been steadfast in executing our growth plans for the hotel business. Our efforts to serve hotels as an active marketing and distribution partner continue to gain momentum, as we grew bookings and marketing revenues strongly in the first quarter year over year.

Our innovative marketing programs like Sabre surround, hotel spotlight and our recently launched hotel upsell continue to take hold and show exceptional growth. Hoteliers realize the value of our powerful marketing alternatives that touch travel agencies directly at the point-of-sale and throughout the sale process and deliver significant revenues. We will build on the success of our hotel marketing programs and launch similar tools in the rental car segment later this year. These are just a few of the many innovations we're bringing to the market.

In closing, we are using our leadership position to drive positive change in the marketplace and within our own Company to create long-term strength and stability. And now, I will turn it over to Michelle.

Thanks, Tom. I'm pleased to report on another quarter of solid performance for Travelocity. We exceeded operating income targets for the North American business and registered robust top line growth. Our operating income story for the quarter in Europe is not where we need it to be. But we continue to be bullish on the region and our business there over the long-term. And we are executing on schedule against our integration plan, the fruits of which will be a solid foundation for profitable growth.

I will now dive into a but more detail on each of our businesses starting with North America. As Jeff discussed, our performance on both the top line and bottom line was strong. And we continue to see benefit from very effective marketing while others in the industry are increasing spending significantly, we continue to drive strong top line growth without increasing marketing spend. This quarter we grew transaction revenue at 21% in North America, while keeping marketing spend flat.

While packaged revenue growth in North America was solid at 22% year over year, we are starting to see the industry-wide pressure from carriers on yield. We believe Travelocity is well-positioned to weather this trend both as we increase our value to carriers through merchandising, upsell and scale and also as we benefit from being part of the largest Sabre portfolio and the multifaceted relationships we have with airlines. Also on the supplier front, in the first quarter Travelocity concluded a global merchant hotel agreement with Hilton. The deal will utilize our next generation two-way connectivity to deliver reservations seamlessly.

And we continue to see payoff from our differentiation strategy of customer championship and from the investments we've made in CRM. In first quarter, we took championship to a new level by rolling out the proactive guarantee with the intent of resolving potential travel problems from closed pool to airport construction before our customers are even aware of them. At the same time, we are also really cracking the code on personalization and CRM. Areas where we have we have a leading position and our rate of success is accelerating. As just one proof point, our incremental bookings from e-mail campaigns grew by 40% year over year in the first quarter.

I will turn now to our newer businesses in North America, starting with the Travelocity partner network where we are seeing robust overall growth. Our long-term agreements with AOL and Yahoo! were both renewed during the first quarter, affirmation that the full-service online agency model is delivering the value consumers seek. On the corporate solutions side, GetThere had another excellent quarter, beating plan and growing corporate transactions by 24% year over year. GetThere successfully completed its user migration with the introduction of the new Travelocity.com air pass. We're also seeing strong performance for Travelocity business with bookings up 87%.

Turning to Europe, we continue to make great strides on the integration front and in simplifying our business. We exited the third party ad sales business where we felt the investment required wouldn't produce compelling results. We outsourced UK post-sales processes to lower cost of operations. And we continued our aggressive drive to consolidate facilities both in the UK and in Germany. Looking at our performance, as Jeff mentioned, while it was a tough quarter on the operating income front in Europe, we were pleased to see that we hit our plan on gross travel books. We remain very optimistic both about about the European region and about our business there.

As we move forward with integration and in line with the strategic priorities that we outlined after our acquisition of Last minute.com, we will manage our online direct-to-consumer businesses for growth and profit and our offline and trade businesses primarily for profit. We have and will continue to make the hard decisions related to noncore businesses and we will achieve operational efficiencies to hit our bottom line goals. Analysts forecasts put European online travel growth in the 20% to 30% range. And as you break down our results in Europe, the top line performance of our core businesses and products are at or better than overall regional growth expectations.

First quarter gross travel booked grew 10% year over year on a pro forma, local currency basis. Breaking down that 10% growth, our trade focused brands grew 14%. Looking deeper though, while Holidayautos growth was minimal, our core leisure focused merchant hotel business, Net Hotels, grew at 48%. Our online consumer brands grew gross travel booked by 14%. But again, a deeper look shows 30% growth in the Last minute.com brand, offset by planned declines of the Travelocity Europe brands.

Taking a product line view. While we saw a significant decline in prepackaged holiday sales from third party's across the region, at the same time we saw a robust 30% growth in our own dynamic packaging. A core area growth for us throughout Europe and one that makes us less dependent on third parties.

Moving lastly to the Asia, Zuji registered strong performance with year over year revenue growth of 65%. Hotel revenue nearly tripled this quarter, due largely to the success of our merchant hotel offering. We also recently announced our intent to enter the Indian marketplace by year end. Travelocity India will be run by Zuji and build on the Travelocity technology platform already deployed in Asia. We expect our robust growth trajectory in Asia to continue throughout 2006.

Just to wrap up, we clearly are not satisfied with our bottom line performance in Europe and we will continue to simplify the business and improve performance. However, we had another great quarter in North America. And overall, we beat our operating income plan. We are confident we will hit full year guidance and that Travelocity's operating income will more than triple in 2006. With that, I will turn it back to Sam.

All right. Thanks, Michelle. We will move to your questions, then.

[OPERATOR INSTRUCTIONS] First in queue, representing CIBC World Markets, we go to the line of Paul Keung. Please go ahead, sir.

The airline contracts are finally coming together. And especially the American deal looks like it's around the corner. I was wondering what this means for the future of the agency -- total agency reductions? And particularly, I believes it provides on several fronts, so I think it impacts many parties here. First, what do you feel is the impact to agencies and all agencies a little impact differently? And I think in the past you talked about the future of the business is going to be more value based rather than just volume based. Second, specific to these deals, do you see these deals having a fundamental change in economics in the online front? And how do you plan to recognize these in the Company, as it relates to Travelocity? And lastly on that same issue, what does it mean from a competitive front with World's Fair and incentive and everyone else up there?

Paul, this is Jeff. I will get started and take probably one or two of those question and then I imagine my colleagues will jump in. A couple of points. One is the TN business does expect to treat all of its agency customers in a consistent fashion. We of course won't talk about any specific deals. They are all different. But we do expect to treat all of our online partners in a consistent fashion with off-line partners. And we do think that there will be an impact on Travelocity's incentives from the GDS. And this impact though is already in our guidance and in fact it was partially in the actuals in the first quarter. And that's all based on the fact that for -- since the beginning of time we had the relationship between Travelocity and TN has been an economic one, which is based on arm's length agreements and market based. And I think that probably covered a couple of your questions. Were there others?

Did that get you covered Paul or --?

One more, how about from the standpoint of; do you see inducements being value based versus volume based and do you think that -- how do you see the competition with everyone else shaking out over time?

Let me talk about the competition issue, Paul. I think that first of all, the balance includes significant cost reduction that we have to continued to do Sabre. That gets reflected in how we price our products to airlines and agencies. So, we are doing everything we can to drive as much cost out of our business as necessary to meet the price points we need to meet.

On the competitive front, we view our competitive position as strong. We have a very strong base of customers who provide access to a terrific set of travelers that produce high yield traffic and require a whole bunch of unique services that we are enable. And people are going to trouble keeping up with us on the innovation side. We're going to to continue to innovate and the services and provide the travel agents and the airlines and the hoteliers. So, I think the basis of competition will move around a little bit. And we hope it moves to reward us for the innovation that we are going to provide for our travel agency customers. And we will find a balance in how the economics work. And again, we are going to do more than our fair share on the cost reduction side to get our price right for both of our customer sets.

A quick question for Michelle, in Europe we are seeing the traditional vertical integrated -- the travel companies are doing a lot better job online these days than we've seen in the past. I was wondering, they seem to be gaining share on a relative basis. I was wondering, why is that the case? Do you see any disadvantages, is that impacting you enough? And what are you doing to sort of stem that sort -- at least to compete a little more effectively there?

Well first of all, most of them are not increases increases in total. They are reporting a shift away from offline towards online and given their small base online, growth in online makes perfect sense. Having said that, we clearly look at them. In some cases, they are partners of ours, we distribute their content and their prepackaged holidays on our site. Having said that, we also obviously, look at them as competitors to the extent that they are looking to consumers for their online products.

Our job is to be the most comprehensive provider of travel packages and not to just represent a single brand. And to make sure we are constantly innovating on the user experience side. Making sure that when consumers come they find what it is they are looking for across a whole wide variety of brands. And of course, always making sure that they get great deals. So, we think we have to continue work hard on our differentiation strategy vis-a-vis be vertically integrated. But of course the value proposition is quite different still for consumers.

The other I'd just add, and it's really just echoing a bit of what Michelle said in her remarks, is that dynamic packaging growth is quite strong. As she mentioned, net hotel growth is very, very strong. That's what we saw in the first quarter.

Did you have any follow-ups, Mr. Keung?

No.

Thank you very much. We will go to the line of Justin Post representing Merrill Lynch.

Can you talk about the continental difference between the UK and continental Europe, are you seeing any difference in bookings levels?

Certainly the U.K. business for us is a much more mature business. It's a larger portion of overall Last minute.com. And as you would expect, the strongest growth is coming from countries like Italy and Spain, which are just starting to come up the adoption curve in online. So, it's certainly what would you expect. Having said that, the UK performed solidly in the first quarter for us particularly the Last minute.com brand.

Just for -- revenue for booking at Sabre Travel Network was higher, I don't know if you commented on that earlier but could you talk about why revenue per booking was up 7%?

Yes, we made in the quarter, we made a change in accounting estimates in two categories. And really that drives almost the entire difference between revenue booking and transaction volume. And let me spend a couple of minutes on those. We made it in two different categories, as I said, we began for our small travel agencies, which we haven't done historically, to do it on an accrual basis. So -- and that had an impact on incentives and on equipment revenue. The incentives was an expense, the equipment revenue was a positive in revenue.

And then we also updated our accounting estimates or our cancellation reserve, which is the change in estimate for the number of bookings -- cancelled bookings that gets rebooked. And so -- and that was a positive revenue impact for the Travel Network business. So two positive revenues, one negative expense. Just so you know, the net of all this was about a $7 million expense in the quarter. So the net of the category of the accounting estimates in these two categories was about a $7 million expense. The two revenue pieces is what drove the difference.

Thank you.

Thank you very much, Mr. Post. Representing Bear Stearns, we go the line of Jim Kissane now. Please go ahead, sir.

First, Jeff, what's driving the better cash flow in '06 relative to your original plans?

Well really, a couple of things, one is I would say a steadiness in the cash flow in Travelocity Europe. But there were probably -- you will notice that we didn't change our range on capital expenditures but we are probably at the very low end of that range. And then a handful of other things. One of them is we are experiencing really nice dividend flows from our ownership stake in ABACUS. So steady-as-she-goes and particularly in Europe and then lower than we expected capital expenditures there, at least at this point at the low end of our range.

And in the K you disclosed some material weaknesses at Last minute. Can you give us an update on your progress in fixing those and is there any connection between that and the lower operating income?

I will, yes, I will update you on that. Again, I will point out to all our listeners that we will probably file our Q tomorrow. And so we will have some information in there about the control weaknesses. We continue to work very diligently on Sarbanes-Oxley's items and we continue to be in a discover process. And as you would expect going through this process as we've expected all along, is we do uncover new items. Some of which might be material, certainly at this stage we are heavily into the remediation and it's going well.

We have a strong team in place. And so, these are findings are part of our audit process and most importantly have not -- and we don't expect them to do any impact on our financial statements. They certainly haven't today and we don't expect them to going forward forward.

And going back to Paul's question I guess for Sam or Tom, can you kind of really get into differentiating your GDS deals with those of your competitors? There's so much talk out there about opt-ins and impact on incentives. I remember you guys used to talk about trying to do revenue neutral deals and then it became profit neutral deals, can you hit some of those points?

I think on the distinction between ours and our competitors, I feel like we've been the most transparent about some of the components that I spoke about in my comments. So laying out the protections that we put in place for travel agents as far as their access to full content, protections from service fees, access to financial parity, those types or provisions. We have been clear to the marketplace that those are important to us, they're important to our customers. And we are going to go out and secure them and we've been consistent in doing so. Beyond that, I don't know what our competitors have done exactly. And they haven't given a whole lot of insight publicly into the structure of their deals. We are creating -- we are crafting deals that are great for our travel agency customers and give them the assurances they've asked for. And great for our corporate customers, who also are concerned about access to full content. And we are still the largest content aggregator in the world. And we will keep that position. And we'll put provisions in the contracts to make sure that the customers that use our services feel comfortable.

Jim, I want to follow up. You had really a two-part question on the Sarbanes-Oxley front. And the second part was whether or not it had an impact on our operating income in the quarter or our outlook. And I think I would simply come back to what Michelle said, which is we feel really good about the integration, we've got a lot of people working on it. We are making progress. We are spending money in this area but it's not inconsistent with what we had planned all along. It's, in some cases, in different categories. The other thing is that some of the work we are doing in Sarbanes-Oxley is consistent with common platforms that would you want to see going forward and in any case, to drive more revenue and earnings. And although I did mention that the first quarter results were impacted by the shut down or the sale of a couple of businesses in the media area, that did have an impact, I think they are very smart decisions. We are glad we made them early but it did have an impact on the earnings of the first quarter.

Great. Thank you.

Thank you very much, Mr. Kissane. Next in queue, we go to the line of Jeff Kessler representing Lehman Brothers.

Thank you. A couple of questions. First with regard to the operating profit, what you described as a disappointing operating profit in the Last minute online situation in Europe. Can you talk about what's causing that right now and what are you doing to improve that?

Well, Jeff mentioned a couple of things. First of all in, the order to consumption curve was longer than we anticipated. So, that's why we talked about meeting gross bookings plan for the quarter but not seeing all of that consumption in the quarter. Secondly we exited as Jeff mentioned, several noncore businesses, which drove earnings weakness in the quarter but we think clearly it is the right thing to do. And then finally, we do think there is a bit of softness in general in Europe. And we are watching that closely not in core products, which is the good news like hotels and dynamic packaging. Finally one last thing, is our advertising revenue for the quarter was softer than we would have liked but we expect some of that will come back.

And again could you repeat what the -- if you want to call it pro forma or organic growth in bookings was in Europe?

On a local currency basis, the pro forma organic gross bookings growth was 10%. But that's 30% in our core online brand, Last minute.com. With planned offsets in Travelocity Europe as we pull back marketing significantly from those brands. And obviously lower growth in our trade business, particularly Holidayautos.

A final question on a larger picture question, with your announcement regarding Priceline, the previous, the earlier announcement on Expedia, maybe some foot dragging on the part of a couple of your airline clients who are assigned already with Worldspan. Is there any indication that the industry may be forming into camps or groups? Or do you still see this as industry usage, particularly supplier usage remaining scale-wide in terms of the GDS systems? Or do we start seeing these -- the GDS systems beginning to group up and, let's just say team up with various suppliers? Or have we gotten to that point yet with these various agreements that have been announced between different GDS systems of late?

Yes, we haven't seen any of what you've described. So, we expect and it is our hope that over time as these deals come to tern and are renewed, our expectation is that all of the GDS's will have access to all of the same content. Now maybe on different terms. Maybe on different terms that's available to each of those GDS's but we don't see any indications of what you described.

I would just add that and we don't view any of the carriers as dragging their feet. We have several months left on our shortage contract. So I just thinking we are in a normal deal cycle here, as is played out with the other carriers.

So it may be just posturing or positioning or setting themselves up for business negotiations so to speak?

Well, we won't speculate on that, it does feel that way at times.

Okay. Thank you very much.

Thank you, Mr. Kessler. We do have Brian Egger next with Harris Nesbitt. Please go ahead.

I just wanted to maybe get a little more insight into what seems like a disparity between kind of performance versus budget for Travelocity's European travel business and Last minute.com, which is as you said, a little soft and Priceline last night, fairly robust European travel, which was driven by I think, principally by strong agent hotel bookings for their acquired sites. I don't know how much of this has to do with, as you said, the order versus consumption curve? Or how much has to do with product mix of hotels versus other or for that matter geography because I know there's been a disparity between performance in the U.K. versus the continent. And maybe your geographic exposures are different. But I was hoping you could comment a little bit on some of those disparities.

Sure. And just to -- we are, as you know, significantly larger than Priceline in Europe, I don't know three or so times as large, so there's a bit of a different scale. But we are seeing a very similar trend with hotel booking growth being very strong. And I commented that about net hotel growth being 48% stronger than products like dynamic packaging. In the Last minute.com business, we clearly have some offsets to that. The prepackaged holiday business is down quite a bit. And clearly we are as we have ramped back significantly marketing spend on some of our core brands like Travelocity Europe brand. That actually has driven obviously less robust growth, as you would imagine. So a planned decline in Travelocity Europe brand. I think also Priceline mentioned an extremely strong advertising spend increase. And that is not the case for our core brands in Europe or certainly not in North America as well.

I think there were some similarities between what they've said and what we've said. Clearly, it is a little difficult to ferret through their numbers. They didn't break out a lot in terms of the European numbers. So we will see over time. I think they mentioned a bit of this uncertainty around the World Cup and seasonality that it may drive over time. And I think we will be learning a little bit more about seasonality over the course of the year as well.

We do have Michael Millman now with Soleil Securities.

Thank you, also a couple of questions regarding the GDS which -- could you talk about to what extent would you say or guide to flat profit this year and declining next year, that's seeing a big increase in hotels and a decline in the traditional GDS kind of business? Sort of related to that we are seeing things like AirTran that their distribution costs were down 16% and that was GDS economics. We are seeing Cendant say that there are discounts and in fact they are getting more aggressive not less aggressive, increasing incentives. And the second question on Travelocity is, last year with Travelocity North America was substantially outperforming Orbitz. And at least in the first quarter it seems to have reversed and maybe you can talk about that as well?

Okay. On a few of those, Michael, let me cover just a few of the items. One, just on hotel growth as I mentioned we are very bullish on hotel growth across a number of aspects. So we have -- we now have over 70,000 hotels in the system. It's far more than anybody else, any other aggregator in any part of this business has. So, we have a big strong base to grow off of.

We've done a good job with driving both volume and price improvement in our core GDS hotel business. And our growth on the marketing services we provide with things like hotel upsell and hotel cross-sell and spotlight are exceptional growth rates, all up north of 35% and 40% in those categories. So, we've seen really good growth across hotel and we have a good base of business to grow off of. We expect that will continue. And in general, we are just getting smarter as a Company about how to work with hoteliers to market their products more effectively. So, we're very bullish on that.

As it relates to comparison on incentives, bottom line is it's really hard to do because we all have different geographic footprints. It's why our unit revenues are different and why our incentive lines are different with some of our competitors. We have this big North American footprint and I think our guidance is reflective of that.

I am surprised to hear though that Galileo or Cendant would be saying that their incentives are headed north.

Following up on the Orbitz comment. Remember over the course of last year, we dramatically -- as a matter of fact I think NetMore almost doubled their size on a gross travel booked basis, if not bigger. So, it is a much bigger base and obviously we have a very strong compare period, we're comparing to since last year was such a stellar year for Travelocity. We did not increase marketing spend over the quarter, so we were really pretty diligent about driving bottom line performance. And even still, our gross travel booking growth rate of 24% was pretty close to where they were at. And still we believe sizably above where the rest of the industry will be.

And then Michael let me just close with, I think one question we didn't cover, you had talked about declining earnings or maybe margins in '07. We've clearly set forth our goal. And I think we've said this on a couple of calls that our goal is to maintain mid-teens margins in this business for the foreseeable future. I think You've seen that in '05. I think we have no reason to see anything differently based on what's occurred in '06 or even in the first quarter of '06.

And, Michael, last question you asked was specific to AirTran. Again, distribution cost is a big category and we are just a small part of that category for AirTran, so I don't know where where that number comes from.

Next, representing Morgan Stanley we go to the line of Chris Gutek. Please go ahead.

Good morning. Starting with Sam or Tom, a couple of series -- hopefully a simple yes or no questions on these GDS contracts. I know you don't want to go into detail, so I'll try to be as -- real simple questions. First, can you guys just confirm for the record that the prices with these new deals is consistent with what you've been talking about, such that your global prices on average will be down modestly?

Let's see. You made that a harder yes/no question. I have to think. The terms that we've been negotiating and the economics that we've been negotiating are consistent with what we've put in our guidance for the full year. And I think any further discussion on details of that, will perhaps come as we get a little further along in the process. And as I think I've said in the past, we may provide at least some aggregate views of what revenues look like for that piece of the business.

Okay. Fair enough. The next one, the given the five to seven year duration of these deals versus three years previously, we've been assuming that there must be some kind of a steady ratchet down in price over the duration of these deals as opposed to a one time step down. Is that a fair assumption?

I would just say that each deal is a bit different. And so I think will you'll have to make your own assumptions.

And I would also suggest that term was driven by -- again as we went out to talked to our customers about what is a balanced solution, part of the term was driven by a universal view that stability for the industry was a good thing. And people wanted to have horizons. Both the airlines and travel agencies wanted horizons that they could do some business planning, that goes more than 18 to 24 months out.

You guys obviously have a strong competitive position domestically. Given that situation, is it your impression that the pricing concessions you are offering to the big domestic airlines are less generous than what some of the competitors, in particular Worldspan or Amadeus, might be offering? Or by contrast, are these just kind of relatively standard common deals across the industry?

Again I hate to guess but that's all we would be doing because we don't really have much insight into what the other GDS's have -- what they have contracted for. Our guess would be that our pricing is better, that our unit revenues are better. But we really don't know. It would be just a guess.

Last one, on the new contracts, you guys have announced deals with a couple of European carriers. Is this in anticipation of specific deregulation in Europe that might put pricing pressure in Europe, or is that still something that's not part of the equation?

No, it's not reflective of a view that European will deregulate, we think it's a long-term discussion. It's really just reflective of the various marketplaces where we've done those deals. And it's some of the same desires we have in the U.S. that provide people with some long-term stability and to give airlines a price point that makes sense to them.

Okay. And on the notion of declining incentives or at least declining growth rates for the incentive payments, is there some type of an opt-in provision with these new airline contracts or is there anything else -- any other mechanism in these new TDS airline deals that will have a direct positive impact from your perspective on incentives? Or is that a whole separate negotiating process with the agencies?

We've been talking about incentive moderation for a couple of years and so I think we are well into that process as it relates to just normal contract discussions with agencies. And we have not rolled out a specific program for agents around this new construct or around contracts that we are signing.

I would like to come back to your point. These are individual discussions with the individual agencies. We have long-term contracts with the agencies as well.

And then finally just real quick, the Q2 earnings guidelines is a little bit light versus where we and I think the Street were expecting. Is there -- and obviously there is some seasonality there. Is it purely a seasonality issue? Or by contrast does the full year guidance now look somewhat back end loaded and maybe include some somewhat optimistic assumptions or potentially optimistic assumptions about recovering performance in Last minute European business?

That was loaded with lots of statements. That was a question loaded with statements. No, this is purely a shifting based on seasonality. We tried to, we really did try to communicate this in the first quarter call -- or in the year end call, I'm sorry. And we are just sort of refreshing that. And it's a natural thing, given that we hadn't given second quarter guidance, but this is purely a seasonality thing based on Last minute.

Next we go the line of Kenneth Berlin, representing [Morley] Fund Management.

Good morning and thank you for taking my call. I would like to ask, how committed are you to sustaining your investment grade credit rating, is the first question? And the second question is, what are your cash deployment strategies this year and going forward and would that include debt reduction? Thank you.

As I think Sam and I both said fairly on a repeated basis, our investment grade credit rating is important to us. It provides us with adequate access to capital. It's not an end all be all. We look at a balance of things and we think about our balance sheets. If you go back over a couple of years, we have bought back stock, we initiated the payment of the dividend. And I think we generally take a very balanced approach. Although, that credit rating is important to us. We haven't announced any plan for either stock buyback later in the year or further debt reduction. And we will probably address that question as we get deeper into the year. Everything is kind of available to us and we will think hard about all those options. Are there other questions?

Mr. Berlin, did you have any follow ups?

Yes, I do have one follow up. Given that you have a negative outlook by Moody's, what specifically --- is there any effort to get that, bring that to stable?

Well, nothing specific. We are in fairly constant dialogue with both Moody's and S&P. We share with them our outlook for our cash flows and our earnings. And I think their outlook and their thinking reflect that. There is a little bit of a different outlook both from the S&P side and the Moody's side. And, no specific visibility to it. But I do remain optimistic as we get deeper into the year and sort of produce the cash flow that we are talking about on this call that Moody's will take a more positive outlook on us.

Great. Thank you very much.

Thank you very much, Mr. Berlin. Next we go to the line of Steve Velgot representing Cathay Financial.

Just a couple of quick questions for me. Jeff, I'm wondering, the revenue recognition for Last minute.com, I take it this year is, is it and is it perhaps next year that you will be recognizing revenue at Last minute differently than you do Travelocity North America in terms of timing?

No, it is not. We recognize all the product revenue consistently between the domestic and international business.

Right. The big difference, though of course, is the mix of business we have in Europe is very different than North America. With North America more air weighted than Europe. So, there is a longer consumption curve for things like hotels and packaging. And our business in Europe is more hotel and packaging oriented.

Okay. But there isn't a timing difference in terms of Last minute done based on actual usage, the consumption versus --?

In both domestically and internationally we recognize revenue when the product is consumed. So that's consistent and it goes back to what Michelle said. There is much more -- there is a much longer curve of book to consume in Europe because of the mix of types of products we sell more of in Europe than we do domestically. So if you, one easy way to see that is that there's much of the revenue in earnings from the Last minute Travelocity Europe business falls in the second and principally in the third quarter. But you are seeing this big cash build up right now and that's sort of is another way to get some visibility to how the mix plays out in Europe as compared to domestic sales.

Okay. And then just a question for Michele. Michele could you give us an idea of whether or not the headcount for Travelocity in total would be similar -- or Travelocity Europe more specifically, similar by the end of the year to where it was the end of '05, or down ? And kind of just relative proportions are we necessarily looking at there?

We have said before and we said this when we first acquired Last minute.com that we see a sizeable opportunity in reducing G&A costs. And we will do that in accordance with making the right technology investments to support more automated processes. And we will outsource things that we think are noncore. So, we have made some of those decisions already in outsourcing U.K. post-sales processes, for instance, which takes down the headcount number in Europe. And we are looking at similar opportunities across Europe. So overall, I would expect the headcount to be down as we seek to improve margins and particularly to improve the percentage of our cost structure that is G&A related.

Our next question in queue, we go to the line of William Mansfield representing Millennium.

Hi, there. Can you hear me?

We can.

I had two questions for you. One was on the agreement you've entered into with Amadeus about content sharing. My assumption on that, was that that was related to what I would call obscure content sharing. Like for some small airlines in Europe that you want access to that you don't have direct relationships with and vice versa. And then lo and behold, a week or two after you entered into it American Airlines got all upset about it put out some press releases, saying you weren't allowed to do that. So, if you could kind of clarify. What was the purpose of that content sharing agreement? That would be helpful. And then the second question is obviously, you've probably represent in the newspapers about Cendant and the approaches they've received from private equity firms. I'm just curious whether formally or informally you've received any approaches as well?

Well, on the first question, the first thing I would say is that we feel very comfortable with the agreement itself that we entered into with Amadeus. So while I suppose there's been some public debate on that we feel very comfortable with it. The primary purpose of the agreement was simply to provide assurances, in particular to corporations, but also to travel agencies that they would -- they could be assured of no disruption in terms of the content that is available to them. It was plain and simple as that. That was it. So, it really was about providing those types of assurances. Now, I would actually be surprised if the terms within that agreement are ever triggered. Meaning, that we rely on content from Amadeus or they from us. So again, it really was about providing assurances to the marketplace corporations and agencies.

As we look at, as we move on to the second question, I think we will be interested in the types of valuations that come out of the private -- what could be private equity or an IPO or maybe other sale options for Cendant. So, we will be interested in the valuations. I think we also think that consolidation is good particularly in businesses where there are pressures on price and on cost. That presents opportunities, I suppose. But I think lastly, I would just simply say that as we think about Cendant and its assets, our plate is clearly full. So I would just kind of lay that out in terms of any specific speculation there might be about what we might do in this situation.

And then lastly we certainly listen to, entertain and evaluate opportunities to improve our own shareholder value on a regular basis. And that hasn't change a whole lot with Cendant's situation. Okay.

Not so crystal clear whether you've been approached or not but I guess that's what you're --.

I wouldn't tell if you we've been approached or not. I'm simply saying that we evaluate options as they become available to us. We also evaluate our options on a regular basis to see how we might improve shareholder value.

Terrific. Thank you.

With that, Mr. Gilliland and our host panel, I will turn it back to you for any closing remarks.

All right. Well, really appreciate your participation on the call. We are looking forward to the good year ahead of us, the good three quarters ahead of us after a solid first quarter. And look forward to talking with many of you here in person over the next several weeks and months. Thanks, everybody.

And ladies and gentlemen, your host is making today's conference available for digitized replay. It's for two full weeks starting 12:30 p.m. May 4 all the way through 11:59 p.m. May 18. To access AT&T's executive replay service, please dial (800)475-6701. At the voice prompt enter today's conference ID of 826526. Internationally, please dial (320)365-3844, again with the conference ID of 826526. And that does conclude our earnings call for this first quarter. Thank you very much for your participation, as well as for using AT&T's executive teleconference service. You may now disconnect.