Sabre Corp (SABR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sabre fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, today's call is being recorded. I would now like to turn the conference over to Barry Sievert, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Shannon, and good morning, everyone. Thanks for joining us for our fourth-quarter and full-year 2014 earnings conference call. This morning we issued an earnings press release, which is available on our website at investors.Sabre.com. A slide presentation, which accompanies today's prepared remarks, is also available during this call on the Sabre website.

A replay of today's call, along with the slide presentation, will be available on our website beginning this afternoon. Following today's call, we invite investors with additional questions to follow up with Investor Relations.

Throughout the call today, certain of our earnings per share, EBITDA, gross profit, net income, capital expenditures, and free cash flow amounts, as well as other financial information that will be provided, are from continuing operations and have been adjusted to exclude expenses and other gains or losses related to restructurings, litigation, and tax matters, and certain other items. The most directly comparable GAAP measures and reconciliations are available in the earnings release and other documents posted on our website at investors.Sabre.com.

We would like to advise you that our comments contain forward-looking statements. These statements include, among others, disclosure of our outlook, including revenue, adjusted EBITDA, net income and earnings guidance. And our expected segment results, our expectations of industry trends, and various other forward-looking statements regarding our business. These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's call. Information concerning the risks and uncertainties that could affect our financial results is contained in our SEC filings, including the Company's final prospectus filed February 5, 2015, and our Form 10-K for the year ended December 31, 2014, which we plan to file early next month.

Participating with me on today's call are Tom Klein, our President and Chief Executive Officer; Rick Simonson, our Chief Financial Officer; and Chris Nester, our Treasurer and Senior Vice President of Finance. Tom will start us off with a review of our fourth-quarter and full-year performance. Rick will then offer some additional perspective on our financial results and forward outlook before turning the call back to Tom for closing remarks. We will then open the call for your questions. With that, I'll turn the call over to Tom.

Good morning, and thank you again for joining us today. 2014 was a strong year of strategic and operational progress at Sabre. And we enter 2015 as an industry leader well-positioned for solid growth. Looking at the results for the fourth quarter, total Company revenue was $646 million, a 3% increase, while adjusted EBITDA increased 2% to $199 million. Adjusted earnings per share for the quarter totaled $0.22.

In our Airline and Hospitality Solutions business, strong execution and customer growth drove a 14% increase in revenue, and our scalable technology platform delivered 26% adjusted EBITDA growth, demonstrating really great positive operating leverage. In Travel Network, revenue declined 1% and adjusted EBITDA declined 9%.

Our performance absorbed the impact of headwinds that buffeted the business almost all year, which we will soon anniversary. And a few very specific items that are unique in the fourth quarter, which I'll discuss in a moment. In summary, as expected, our solutions business' performance was strong and our Travel Network business had a soft quarter, adding up to a solid but muted quarter on the whole.

Looking more closely at Airline and Hospitality Solutions, 125 million passengers were boarded through our SabreSonic CSS reservation system in the fourth quarter, an increase of 4.5%, without the addition of any new SabreSonic CSS implementation. So this was all driven by organic growth from current customers. Our broad portfolio of leading commercial and operation solutions also continued to perform well. In total, the strength across Airline and Hospitality Solutions produced revenue growth of 14% for the quarter.

Excellent flow-through from our SaaS-based solutions drove a 26% increase in adjusted EBITDA to $85 million, resulting in an adjusted EBITDA margin of 39.6%. Airline Solutions uniquely goes to market with a broad suite of best-in-class solutions, giving us a distinct advantage when competing for new business. In the fourth quarter, we expanded in Europe by contracting with Alitalia for a broad technology suite, including SabreSonic CSS reservations, AirVision commercial, and Air Centre operation solutions.

Also recognizing the value of our integrated best-in-class solutions, Panama-based Copa Airlines contracted for a similarly broad suite of technology solutions. These deals further add to our SabreSonic CSS implementation backlog that now totals more than 250 million passengers boarded, business that will drive growth in 2016 and 2017.

In Hospitality Solutions, we launched our new SynXis Enterprise Platform, a fully integrated hospitality platform designed to enable hoteliers to build their business operation around the guest experience. We were excited to recently announce that Wyndham Hotel Group, the world's largest and most diverse hotel operator, has selected Sabre and will roll out our SynXis property management system for 4,500 properties. This entry into the enterprise space is a breakthrough unique to Sabre and a position that we expect to build upon.

In summary, Airline and Hospitality Solutions finished the year strong, with record full-year sales, revenue and adjusted EBITDA. We have strong momentum, including a robust pipeline of implementations, sales, and new innovations as we enter 2015.

At Sabre Travel Network, direct bookings were up 1.1% in the quarter. Our performance was led by strong bookings growth of 7% in EMEA and modest growth in the Americas, dampened by continued weakness in Venezuela. Revenue declined 1%, and adjusted EBITDA declined 9% in the quarter. As we've discussed, revenue and adjusted EBITDA growth were affected throughout the year by the pricing impact of the American Airlines and US Airways merger. Fourth-quarter results absorbed the impact of reduced data processing revenue from one of our joint ventures, which was not due to a decrease in volume, but rather the accounting treatment on the timing of revenue recognition.

On the expense side, the fourth quarter was also impacted by the timing of recognition of certain cost-of-revenue expenses compared to fourth quarter of last year. These two impacts are unique to the fourth quarter. As we've discussed previously, we will anniversary the majority of the headwinds during the first quarter, setting the stage for expected stronger growth in 2015.

Consistent with our strategy, we're nearing the completion of our exit from the online travel agency business. As I'm sure you've seen in our recent filings and today's release, we've reclassified the segment to discontinued operations. In the fourth quarter, we received a binding offer for lastminute.com from Bravofly Rumbo Group for a total consideration value of approximately $120 million. We're in the process of clearing regulatory approvals, and expect the transaction to close in the first quarter. And just last month, we sold Travelocity.com to Expedia for $280 million in cash.

Looking back at our full-year 2014 performance, it was a year of strategic progress and important milestones for Sabre. Total revenue increased 4%, while adjusted EBITDA grew 8%, highlighting the strong operating leverage in our solutions business. Full-year adjusted earnings totaled $0.94 per share. Airline and Hospitality Solutions continued to build its market position, with 10% top-line growth and a 33% increase in adjusted EBITDA. This growth was underscored by the biggest sales year in the history of both businesses, punctuated by key wins with American, Air Berlin, Alitalia, Copa Airlines, as well as China's HNA Hotels and Resorts, and the Wyndham Hotel Group.

Our expanding technology leadership is based on delivering vital innovative solutions to help our customers meet their biggest challenges, especially in the areas of data and analytics, personalization and mobile. Our most recent technology introductions in airline solutions include Intelligence Exchange, Dynamic Retailer, and Customer Data Hub; solutions that align with the important customer trends to leverage data.

In Hospitality Solutions, we introduced the introduction of the SynXis Enterprise Platform as a unique offering that integrates flexible solutions for the entire spectrum of customers, from the independent hotelier to the world's largest hotel chains. And we'll continue to bring innovation to market, the latest being InstaSite announced just yesterday, a turnkey web solution that can be customized and launched in less than a week.

We also continue to build the strength and the value of the Travel Network, adding thousands of new hotels and dozens of regional airlines. We extended the reach of Travel Network through TripCase Corporate and TruTrip, key differentiators from our competitors. TripCase managed more than 30 million trips in 2014, which we believe is significantly more than any competitor in the industry.

We also signed important new agency and corporate customers and we continue to build our presence in Europe, expanding our share by 140 basis points across EMEA. With the anniversary of the headwinds during the first quarter, continued strong momentum in EMEA, and improving economic and capacity trends in North America, we expect stronger growth in 2015.

At Travelocity, we realized approximately $500 million of total value by exiting the OTA business through the sale of multiple properties and brands over the last couple of years. This has allowed us to further de-leverage our balance sheet. And it increases our strategic and operational flexibility going forward by allowing us to double down on our focus and investment in our core areas of strength and competitive advantage.

In short, we're focused on competing where we can win. The Airline and Hospitality Solutions business finished the year strong, and enters 2015 with considerable momentum. In Travel Network, we maintained global share, increased our presence in EMEA, and positioned the business for better growth going forward.

With that, I'll turn the call over to Rick to walk through our financials and full-year guidance.

Thanks, Tom. Q4 adjusted EBITDA performance was a result of good revenue growth across Airline and Hospitality Solutions, and particularly strong earnings flow-through. A quick recap of the consolidated quarterly results. Revenue was $646 million, an increase of 3% year on year. Q4 adjusted gross profit totaled $280 million, a 9% improvement from the same period in 2013. And total adjusted EBITDA increased 2% to $199 million. Sabre consolidated adjusted earnings per share totalled $0.22 for the quarter.

On a full-year basis, revenue was $2.6 billion, an increase of 4% year on year. Adjusted gross profit totaled $1.1 billion, an 8% improvement from 2013. And total adjusted EBITDA increased 8% to $840 million. Sabre consolidated adjusted earnings per share totaled $0.94 for the year.

Moving to the balance sheet and resulting cash flow. From Sabre consolidated adjusted EBITDA of $199 million, we generated $40 million of adjusted free cash flow, bringing our full-year adjusted free cash flow to $293 million, an increase of 61% over the prior year. Total adjusted CapEx ended the year at $265 million. Total net debt was $2.9 billion as of December 31, reflecting significant debt reduction this year, driven by the IPO proceeds. Resulting in a net debt to trailing 12 months adjusted EBITDA ratio of 3.5 times.

Pro forma, for the $280 million of Travelocity.com sale proceeds, our leverage ratio would be 3.2 times. With the sale of Travelocity.com complete, we are well-within our target leverage ratio range of 3 to 3.5 times.

While we continue to invest effectively in the business to drive profitable growth, we are generating increasing levels of excess cash. We will use excess cash in the following order: first, payment of our regular dividend with a target to grow it through increasing net income and possibly increasing our target payout ratio; second, share buybacks and/or strategic M&A. We have a proven ability to take on a bit more leverage and quickly de-lever back to our target range if we identify compelling opportunities above and beyond our current mid-term expectations.

Foreign exchange has been top-of-mind, given the rapidly appreciating US dollar. At Sabre, I want to point out, we are different from many US-based global technology companies, as approximately 95% of our revenue is building US dollars. And about 20% of our operating expense is in foreign currencies. Therefore, we really have no material foreign-currency risk in our revenue line. The benefit from operating expenses denominated in depreciating currencies is largely offset in the short-term, as we have always partially hedged with a series of rolling hedges.

Let's turn now to the 2015 outlook. During the IPO and since, we've talked about our medium-term targets for revenue growth, defining the medium-term as three years, plus or minus. In Solutions, we said we expect 12% to 14% growth, on average, across this arc of time. For Travel Network, growth of 4% to 6%. We remain confident we will achieve these average growth rates over the period. We expect our commercial momentum and implementation backlog to yield accelerated growth in 2016 and 2017, supporting our growth targets for Airline and Hospitality Solutions.

In Travel Network, a more supported macro environment and the passing of 2014's headwinds give us confidence in hitting that range, on average, over the period. We'll continue to share our medium-term expectations and targets as we move through 2015 and push into the outer years. Our 2015 guidance supports these medium-term goals. In 2015, we expect revenue of between $2.77 billion and $2.8 billion.

In Airline and Hospitality Solutions, we expect revenue growth of between 9% and 11%. This growth will be driven in part by expected passengers boarded growth of approximately 10%. Passengers boarded growth is anticipated to be below this level through the first three quarters, and significantly above the level in the fourth quarter, due to the expected timing of customer implementations. Passengers boarded growth will be impacted by the departure of one of our smaller customers in the first quarter, a customer that is returning to a pure play, low-cost carrier model with less robust reservation systems.

At Travel Network, for the full year, we expect revenue growth of 4% or more, driven by bookings growth of around 3%. We will anniversary the impact of the AA/US Airways merger and the Venezuela impact during the first quarter. And we expect to continue to outperform in Europe, Middle East, Africa.

Additionally, we believe macro trends are supportive of higher bookings growth. Recent data points and forecasts indicate higher capacity growth in 2015 versus 2014, which includes a material step-up in North America, our largest market. With lower fuel places that give airlines more flexibility in pricing to stimulate demand, and more money in consumers' pockets, we believe we are positioned for stronger growth in 2015.

Moving to earnings. We expect adjusted EBITDA of between $895 million and $910 million. We expect adjusted net income of between $275 million and $290 million, resulting in adjusted EPS in a range of $1.00 to $1.06.

In 2015, we expect to see acceleration of free cash flow growth that we've been discussing. We expect more than $300 million of adjusted free cash flow and over $250 million in free cash flow in 2015. The primary difference between these two being essentially the last of the American Airlines credits.

GAAP CapEx is expected to be approximately $250 million. As we ramp up to deliver our implementation pipeline, capitalized implementation costs will step up, and are expected to be approximately $75 million. However, this amount is expected to be fully offset by upfront cash solutions fees.

I'll now turn it back to Tom.

Thank you, Rick. In total, 2014 was a year of transition with purpose. We narrowed our focus on areas where we have great competitive positions and where we can win. The strategic work we've completed gives us flexibility, and positions us to deliver greater expected growth and stability, rare for a technology Company, as well as increasing cash flow.

We enter 2015 a more focused and flexible organization, leaning into our strengths. We carry significant momentum in our Airline and Hospitality Solutions business, and we believe that Travel Network is positioned for stronger growth ahead.

And with that, I would like to ask our operator, Shannon, to open the call for questions. Shannon?

Thank you. (Operator Instructions) John King, Bank of America.

Thanks for taking the question. Just a couple, if I can.

Firstly, on the data processing revenues, obviously that was a little bit light for Q4 from your partners there, including ABACUS. Can you just talk us through what are the assumptions you're making for the full year for 2015 on those revenues, and whether that bounces back? That was the first question.

And then again, I know just going through the numbers there, that the gross profit growth is quite a lot stronger than the EBITDA growth. So Rick, if you could just talk us through the moving parts to what's going on there in the cost space, that would be great. Thanks.

John, let me start with the joint venture processing revenues. Just to be clear, as I said in my talk, the volume of processing was significantly up year over year. There was a timing issue with how that contract was structured, which has recognized the majority of the revenue in the first three quarters. Whereas in 2013, we had a big adjustment in the fourth quarter, due to how the contracts are structured with minimums.

So it wasn't a volume issue, and we expect that next year we will again recognize the majority of the revenue from that processing in the first three quarters of the year. And we won't have the bad year-over-year comp.

Hey, John. In terms of gross profits, EBITDA, the ratio, for the year, we had additional public Company costs in the SG&A line. And then specifically to the fourth quarter, we had revenue growth of 3.1%, adjusted EBITDA growth of 2.4%. And again, this was largely impacted by the Travelocity -- or excuse me the Travel Network. We had great flow-through, great margins, gross margins, great flow-through to the operating margins in the solutions business.

And in Travel Network, what we had there was -- again, we were impacted by some of the factors on the top line. But we had a bit of accrual true-ups in the cost of goods sold that we needed to catch up over the year there. That impacted fourth quarter. And as Tom mentioned in his prepared remarks, those are unique and one-time in the fourth quarter. We scrubbed that and we won't see that going forward.

Got it. And then if I could just sneak one more in. On the solutions side of the business, obviously the PB gross wasn't actually that strong, but you're obviously selling a lot of other stuff. So what were the big drivers there in terms of outside-of-the-reservations product? Where are you seeing the particular strength in that side of the business?

John, I would say it's actually pretty balanced across the portfolio. Both the commercial solutions and the operations solutions are competing well in the markets. I said before that we can compete on a best-of-class deal on any one solution. And we're often selling these bundled deals or portfolio deals where we're selling multiple solutions. So again, it's pretty balanced across the portfolio.

And as I mentioned, we started to really add some new innovative product into the market as well. So we have pipeline for some brand-new lines of business. Some of that got sold in 2014, but we've already started to see traction this year.

And we've got to not forget Hospitality Solutions. That's part of our solutions segment. And Hospitality Solutions, while at this stage significantly smaller than Airline Solutions on revenue, is growing fast and faster. And that helps contribute to that.

Great. Thanks, guys.

David Togut, Evercore ISI.

Thank you. Embedded in your 3% bookings growth assumption for Travel Network this year, could you drill down into your assumptions for passenger traffic growth by major region? And to the extent you're building in share gains in EMEA, if you could discuss the major drivers behind that?

Yes. I think on the capacity side, David, we're pretty much using third-party data from people like Boeing and Airbus, and we're fairly conservative with our assumptions. Capacity growth is just one factor, and doesn't translate percentage point for percentage point to bookings growth.

That said, let me talk about EMEA. We said 140-basis point improvement last year from a share perspective; we feel like that 1 to 1.5 points a share is achievable. We entered 2015 with a number of contracts already sold that need to be implemented in the Travel Network business. So we feel confident across EMEA. Between the new markets that we've opened -- we opened more than a dozen new markets across EMEA -- as well as some of the conversion sales we already have, that we'll be able to continue at this pace of 1 to 1.5 points a year that we've had a couple years running now, being able to achieve.

And David, on regionally, North America, a little bit more color. As I referenced, the main thing in terms of seeing that kind of bookings growth is also driven by the fact that North America is our biggest market. And the corporate travel environment, we believe, is improved and will be improved in 2015 compared to 2014.

And then the other things we talked about, in terms of the capacity -- it is a lagging thing, as Tom mentioned. But all else equal, you've got to like the fact that people are expecting capacity to increase in 2015 versus 2014, including in North America. And the impact of fuel prices, in terms of how the airlines might use that to stimulate demand to absorb that capacity, and consumers might have a little more discretionary income.

Again, we think those are good macro things, but we're really first relying on -- there's more robust corporate environment, and then pick up some of those macro things on a little bit of a lagging basis.

Got it. And as a quick follow-up, can you update us on the status of the timing of the conversion of the American Airlines solutions contract? Also Air Berlin?

What we've been saying is that we'll have this pipeline implemented in -- potentially, a piece of it -- in late 2015, the large majority of in 2016. And then some of it will be in the early part of 2017. It's really the carriers' to say and announce when they're going to do these cut-overs, it's their reservation system for the provider. They need to lead on when they're going to cut over, and none of them have publicly announced that yet, so I'm not at liberty to do so.

The good thing is, we've got flexibility here in terms of working within the carriers' schedules, in that American Airlines is coming first for us in the order. But Air Berlin, Alitalia, Copa -- that shows the robustness of our portfolio. And we can work to implement them in different slots across that time period, as Tom has mentioned, and work with the carriers on that.

Yes, and just to be clear, we're on our expectation. I just am not at liberty to say dates.

The other thing to note, though, is on these portfolio deals -- so the Alitalia, the Air Berlin, the Copa deal -- we're implementing product today. Because again, we have a broad portfolio of solutions, so some of the commercial software and some of the -- at Air Berlin, as an example, is in already, and we're starting to get revenue from that. So we are seeing revenue from these deals much sooner than the reservation cut-off. But the bigger chunk of revenue is when we do the reservation cut-over.

Understood. And a quick final question: Rick, you alluded to the possible use of proceeds from the Travelocity sale. Should we assume all that goes toward debt paydown this year?

Well, again, David, as I mentioned, on pro forma, we'd be at 3.2 if we used it for that. In terms of debt paydown, what we're looking at is -- you're well-aware in our capital structure we exercised what we could on the 2016 bonds, using the proceeds from the IPO. Our 2019 bonds that are 8.5% start to have some callability in May 2015, so May of this year. And what we'll look at is whether or not we can opportunistically refinance that, and look at the mix of the cash coming in from Travelocity's sale. And again, as we look at strategic M&A, that will be the toggle on that.

But we feel real good about where we are on the capital structure, our ability to get increasingly lower interest costs at any given level of debt. And it's great to have $280 million in the bank from the sale of T.com.

Understood. Thanks so much.

Brian Essex, Morgan Stanley.

Good morning, and thank you for taking the question.

I was wondering if you could dig in a little bit into some of the headwinds you had last year. And if there's any way to quantify that, if you have the Expedia multi-sourcing, you've got the merger and you've got Argentina. As you lap that this year, is it entirely -- it sounds like most of it is lapped in the first quarter. But maybe we could quantify that a little bit? And then offer a little bit of how that might impact seasonality through the year, or at least the compares over the year?

Good morning, Brian. This is Tom. Really, it was two. It was the American Airlines/US Airways contract on the Travel Network side. Which, that pricing consolidated at the merger approval in the first quarter of last year. So that piece will anniversary this quarter; it's a little more than a point of growth.

The other impact was Venezuela. And those of you who follow the airline industry know that almost every international carrier has stopped selling tickets in Venezuela. Some of them are flying a limited schedule into Venezuela. But volumes there are down more than 50% year over year in 2014 versus 2013. I don't see a recovery in sight there, based on what's going on with the government. I don't believe it gets significantly worse. So I think we'll largely see that year over year -- again, about a point year-over-year anniversary here in the first quarter.

But again, I think it could be a little worse than it's been, but I don't think it will be a big step down. So Venezuela -- this place where we have almost the high-60%s market share, we have a couple of carriers using the reservation system down there. So for us, it was a reasonably large market.

Starting in Q2 this year, those are fully anniversaried, and those two account for no more than 2%. So it bridges from our 2% growth of last year to 4%, all else equal. And then we talked about some of the other factors that we expect to take advantage of that keeps us above that 4%.

Got it. And then just had one question on the Orbitz acquisition -- how you might anticipate that might impact your business going forward? If you see any material change on the horizon due to that business combination? Or is that a relatively immaterial event for you?

I think it's just too early to say. I mean, Expedia has got a lot of work to do, and we have a great relationship with them. But I think it's too early to say what will result from the Orbitz acquisition.

Okay, great, thank you.

Jason Kupferberg, Jefferies.

This is Ryan Cary for Jason. Just a quick question. Looking at the airline solutions side of the business, is it safe to assume most major carriers already have an outsourced reservation system? Or are there still big portfolios that are currently doing this in-house and may come up for bid? And just on the back of that, Alitalia and Copa -- is this something that they had done previously in-house? Or was this a win from a competitor?

Let me start with Alitalia and Copa. Alitalia is in-house; Copa was the Hewlett Packard reservation system -- so a competitor. As far as the portfolio that's available out there, we've talked about selling into about 1 billion passengers boarded that will come up for bid over the next couple years. And in that are still some of the largest carriers around the world.

So there are still a number that have an in-house reservation system, or a reservation system that's more or less custom to them, even if a third party is providing the majority of the services. And we think all of those over time will be opportunities.

So still plenty of business to go get. And we're in every single bid. So we feel good about our ability to convert a chunk of that pipeline.

Great. And it seems like to-date, most of the acquisition focus has been more focused on growing on the solutions side of the business. So I was a little surprised to see the recent S-1 talk of an acquisition on the Travel Network side. I know it's still early, but are you able to give us a little more color on the acquisition? And maybe how it improves the offering, the competitive posturing, et cetera, et cetera?

We really can't. We're in an awkward spot with that where we disclosed what we had to disclose because we were doing an equity offering, as you know. That's all we can disclose at this point. I would just say that it's a unique opportunity, and we're excited about it. We'll see where it goes.

Great. Thanks so much.

Jim Snyder, Goldman Sachs.

Thanks for taking my question. I was wondering if you could provide a little bit of color on your expectations for 2015 within solutions, in terms of the growth rate, relative between airline and hospitality. And given the color you gave on the customer roll-ins and implementation dates, do you have relatively high confidence in the revenue growth assumptions you put in there, bracketing the changeability in those dates?

Yes, I think first of all, one of the unique characteristics of the business is, we do have an awful lot of recurring revenue, and we have very high customer retention rates. So as we enter a year, we have pretty good confidence on our visibility on revenue. There's certainly a chunk of it, like in any technology company, that needs to be sold in-year and turn into revenue in-year. But again, we go into a year, say, north of 80% of good revenue visibility. So we feel good about what we've laid out.

We don't have big CSS implementation. So no reservations implementations in 2015, with the exception of, again, potentially in the fourth quarter. We may be able to bring one of them in, in the fourth quarter. But for the most part, on the reservation side, it's organic growth. And we continue to sell our operations and hospitality -- I mean our operations and commercial solutions into airlines all over the world, either in single deals or in portfolio deals. And Hospitality will continue to outgrow Airline Solutions.

That's helpful. And then as a follow-up, within the solutions segment also, the margin levels that you're achieving running about very high, 30% range, in line with what you've talked about being able to achieve. Is there an opportunity going forward for those margins to move up from here? And how do you think about the relative re-investment levels in that business versus what you let drop through the bottom line?

Hi, Jim, this is Rick. Great question. We had very strong margins in the back half in the solutions business, great flow-through, over 39%. For the year, we were at about 36% in 2014. And the guidance for 2015 is expecting similar levels overall for the year of around that 36% level in solutions. As we talked about, that's right on where we expected. That puts us at moving from, in 2013, a 30% unit level, to the high 30%s as we go through this mid-term expectation.

Always, in the second half, it's a little stronger seasonally, but we expect that to be solidly right in that upper mid-range. And as we've talked before, our expectations on the medium term for the high 30%s certainly isn't any kind of limitation, as we can continue to get scale and leverage in the business.

As I mentioned, we'll keep updating you as we start to push out into 2017 and 2018 deeper. But remember, we've gone from where Hospitality Solutions was significantly below that kind of margin level in 2012, 2013, and 2014, at the unit level. And with its scaling and growth, it's going to start to close that gap while we're also putting on additional scaling, getting the benefits on that, as we do these large implementations on airline.

So we feel good about where we are in 2015. We feel good about that medium term in the high-30%s. But it isn't certainly a limitation.

Yes, Jim, I think the other thing that I don't want to have get lost here is, our CapEx is essentially -- a big chunk of it is our R&D. And our ability to invent and to innovate is significantly different from what our competitors are doing. We continue to put new product in the market, whether it's things like the SynXis Enterprise Platform -- which gives us access, we think, to a segment of the hotel industry that's not been cracked by any of our competitors; or whether it's some of the announcements that we've made in the Airline Solutions around new products like Intelligence Exchange and other new lines of business.

So we're disciplined about that. But we continue to invest in new product and new lines of business where we either think there's a market segment that we're missing, or there's a solution that's going to be unique for our customers, that continues to broaden our portfolio. We'll continue to not just acquire tuck-ins in the solutions business, but we'll look to organically build new innovations and deploy them into the market.

Right, and we would never make the trade-off of keeping margins at 39% because we hit it in a couple periods and sacrificed profitable additional growth in a business that we don't think is anywhere seeing the limitations of what's available in the addressable market with a market-share leader.

That's helpful color. Thank you.

Bhavan Suri, William Blair & Company.

Nice job, and thanks for taking my question. I just wanted to continue touching on the Hospitality Solutions business for a second. With the SynXis Enterprise Platform that you launched, just any sense of early traction and the ability to pull those two things -- the reservation and the property management systems -- together? How are customer conversations going? And what does the pipeline or early thoughts on pipeline look like for 2015 and 2016?

Thanks for the question, Bhavan. I think, first of all, our customer conversations have changed in a really positive way. The Wyndham is, as I said, the broadest and most diverse operator of hotels -- in the first quarter. Earlier in this quarter, we sold Four Seasons on the SynXis central reservation system portion of the platform.

So if you think about the selection of hotels in the Wyndham portfolio, and then the Four Seasons all the way on the other side, from a luxury perspective, at scale. And we have a lot of other luxury chains, like Mandarin and Shangri-La, and others in the portfolio.

I think that's gotten everybody's attention, that we have a solution that can handle that breadth of hotels. And it is the desire of the industry -- our view has been, the desire of the industry is to have a single view of the customer through the central reservation system and the property management system.

So our conversations are going very well. I think it's a matter -- we're going to be patient in the large-segment part of the market, for the enterprise market. We don't want to be a custom developer for those big hotel groups. We want to leverage the platform we have. And that's exactly what we're going to do with Wyndham and Four Seasons. And we hope a lot more.

That gets to my next question, which is -- to get away from being a custom solution developer, your largest competitor that's doing that custom development for Intercontinental, they've shown the ability, at least in the past, to leverage one development to one customer, and then across multiple others. But obviously, on-premise versus cloud. How do you feel from a differentiation competitive perspective against them?

And then if you could also just touch on if MICROS is doing anything now that it's part of Oracle? Are you seeing them less aggressive in the market? It would just be great to get some color on the competitive environment there.

Sure. Let me just draw a couple differentiations. One is, we signed the contract with Wyndham in the fourth quarter. We'll see revenue in 2015 from that contract. Our competitor doesn't have a solution today. And as far as I know, they don't have a contract with IHG, they have some partnership agreement. You'd have to ask them. But I view IHG as being in our pipeline today, and we'll continue to knock on their door.

As far as MICROS, they're very big in property management, and we haven't seen any significant change since the Oracle acquisition of MICROS. They continue to be a good competitor. We cooperate with them in some cases. But I think in general, our view is that when big horizontal players like Oracle buy an asset like MICROS, that's generally favorable to a player like us, who really is focused on domain expertise, and very focused on a set of capabilities that are specific to the experience that hotels want to deliver. And we're not trying to sell them databases and other sets of software. We're really focused on their customer-facing technology and their operational technology.

That's helpful, thanks. And then just one quick one maybe for the team. On the core business, on the Travel Network side, the Expedia roll-up of Travelocity and Orbitz and the rest of it is interesting. Expedia went from having one provider on the GDS side to two, and now with potentially the Orbitz side coming out -- and I know it's early. But just your thoughts around the risk of a third player tying into Expedia to drive just average market share down. How should we think about that? And how worried should we be about that?

Like I said, I think it's pretty early. I think we do a great job for Expedia. I think that the diversification that they did was a risk-based diversification that made a lot of sense for them. And I know we talked about for a long time -- we still have the lion's share of their business. And I think we do a great job for them. We haven't had any discussions that would suggest differently.

Okay. Thanks for taking my questions, guys, that was really helpful. Appreciate it.

Ashish Sabadra, Deutsche Bank.

Good morning, Tom and Rick. Solid momentum in the solutions business. I just wanted to focus more on the airline commercial and operation solutions. Malaysian Airlines announced yesterday that they are going to implement your Airline Solutions. I was just wondering if you could just comment on the pipeline -- both the implementation pipeline, as well as the prospect pipeline, for that commercial and operation solutions within airlines.

And also, what are the key drivers for this accelerated growth? Is it more like your success in cross-selling into existing customer base? The aging IT infrastructure for airlines? And also how are the lower oil prices playing into those decision-making processes? Thanks.

Okay, let me walk through a couple things. First, I think that, again, very profitable airlines. And if you look at the stunning results that the industry is having right now from a profitability and cash perspective, it's just a good environment for re-investment and spend. We like the cycle that has technology that needs to be upgraded. So we're in an upgrade cycle across a number of the solutions. And then, just the ability to buy, I think -- we like that environment, as I said. And as Rick mentioned, in 2014, we had the best sales year we've ever had in both Airline and Hospitality Solutions, as far as new sales.

It's really a combination of a few things. One, we absolutely cross-sell, and sell the integration value of the portfolio, which -- nobody else can tell that story. And we continue to work hard to integrate across the portfolio. You're never done with integration. But having operations systems that talk to commercial systems and vice versa, matters. And we talk about the benefits, and we think we uniquely understand those benefits, both operationally and commercially, for our customers.

And the second thing that I would say is that, as we've gotten deeper and deeper, and as you go from transition from premise-based software to an ASP model to a SaaS model -- frankly, we're just leaving some competitors behind. We have a lot of boutique competitors across our portfolio who just can't keep up with the pace of that technology change. And we're doing it at scale across a lot of solutions.

So we're walking in and talking about not just the software side of things, but the service side of things. We have best-of-class capabilities on the operational side that, again -- just keeping up with what's going on in data centers and use of the cloud is -- the changes there are just stunning. And it's hard for small competitors to keep up.

From a pace perspective, where the reservations businesses will see a handful of deals a year that we're bidding on, the pace of this business is, we're seeing 20 or 30 or 40 sales activities every week. Whether it's an upgrade or a new sale or solution or an add-on, it's that kind of pace. So again, very balanced across the whole pipeline. It's a nice balance versus the reservation business, which is lumpier. But the business will always be biased to those big reservation deals that drive a spike in revenue in a unique way. But this is just Steady Eddie, and we're very deep and broad in the portfolio.

That's great. Thanks for that color, Tom. Just quickly -- Rick, I believe you mentioned there's going to be a departure of one small customer in the solutions business. I was wondering if you can just quantify how big the impact is from that.

It's pretty small, and it's in the low millions of PBs, or in the under-$10 million kind of level. So it's somebody that, again -- change of ownership there. They've gone to a bare-bones reservation system. So that does have the impact that I talked about. And it isn't that they've gone to another full-service or robust reservation system. We see that every so often, and it really is an every-so-often case -- pretty rare.

Okay, thanks for that color. And just quickly, on the free cash flow, we saw some good improvement in the free cash flow in 2014. And you've guided to $300 million-plus of free cash flow in 2015, which equates to a free cash flow conversion of about 1. How should we think about the free cash flow going forward, once you onboard 250 million PBs in 2016 at 2017? Just wondering if you could provide a longer-term view of free cash growth going forward?

Yes, thanks, Ashish. As we said, we feel real good about 2014. We came in a little stronger than what we expected there, so that's great. And we continue that momentum in 2015. And we start to get to the cleanliness of the financials, where you can start to see the free cash flow in 2015 and 2016 and 2017 really coming. The difference between the $300 million adjusted and $250 million, again, is the legacy of that one line-item adjustment around the AA settlement cost.

So going forward, as we talked about before, with the growth first in solutions that are double-digit on the top line over this arc of time, the low single-digit growth in Travel Network with stable margins, great cash conversion solutions, double-digit top-line growth with the expanding from mid-30%s to higher-30%s margins, and continuing to have effective CapEx -- that's what really starts to get us into that level where we talked about in 2017, we would be looking for somewhere in the range of $500 million or more in cash flow.

That really starts to show the power of the model. And we've got a nice proof point, we believe, that will come up in 2015 off a stronger-than-guided-to 2014.

That's great. Congrats.

Manish Hemrajani, Oppenheimer.

Thanks for taking my call. Airline hospitality EBITDA was at its historical peak in the fourth quarter. Can you maybe talk about seasonality in EBITDA in both AHS and TN? And then, should we expect them to be along similar lines to 2014? What percent of AHS segment contribution comes from the reservation system?

Manish, thanks. We aren't giving breakout specifically on the different segments in solutions, the reservation, the AirVision, Air Centre and Hospitality. But as we've said in the past and in our 10-K coming up we will give the breakout between revenue in Hospitality Solutions and revenue in the Airline Solutions. So you'll have those point data.

And again, our CSS reservation business, as we talked before, has been around 50% or so of the total Airline Solutions business. But there's volatility in that, as you recognize revenue in a little bit lumpy way in terms of when implementation of those businesses come on, as Tom alluded to before.

Then when it comes to seasonality, we typically have had a little bit better margin structure in the back half of the year, I would say, in the solutions business. But going into quarters, I think you can draw misconclusions about -- over-conclusions, one way or the other -- about predictability of exact seasonality between Q1, Q4, year to year. Because it's really driven by a little bit of the lumpiness of the reservations business.

Got it. And then, we've seen you guys winning the Alitalia contract in EMEA and one of your competitors winning the Southwest contract bid in North America. Can you maybe talk about some of the reasons why or why not one solution was chosen over the other? And what are you seeing on the competitive landscape? Is it largely a two-horse race? Thanks.

Yes, I think, first of all, I would say we feel like we're in almost every bid for every solution in the airline business. And we're generally bidding against one other person. And so it depends on the solution we're selling, and it depends on the shape of the airline. But it is increasingly rare for us to see, other than Navitaire and Amadeus in the reservations area.

And then in most of the other suites, there's single competitors that are global. There's [good] competitors that are on a regional level. But we feel like we have a shot to be in every deal, and to be down-selected in every deal, and have a decent win percentage. So we feel good about our ability to compete in general.

From a standpoint of the why each deal -- we've talked a lot about Southwest in the past. I think I'm going to pass on going into anything further on that.

I think from an Alitalia perspective -- we talked to Alitalia about a broad set of solutions that would help enable where they want to take the airline going forward. They have, as I mentioned, an in-house reservation system that they were struggling to get what they want out of it, as they look at restructuring the airline. So they will use our technology for a broad set of initiatives to help reposition the airline in Europe. And they've gotten some new capital infused into the airline, and we're part of that turnaround plan.

Got it. And then you talked about 1 billion in PBs may be coming up for renewal over the next two or three years. How much of that is legacy versus at one of your competitors?

Yes. Let's call it -- of the billion PBs that we believe will go out to bid, we think somewhere between 650 million and 700 million of it is either a legacy competitor or in-house system. And the remainder is on us, or one of our competitors. And the retention rates in the business are very high. So we would expect to hold onto the business we have.

I suspect our competitors expect to hold onto the business they have. So we think there's 650 million to 700 million out there that's fair game. Some of those won't decide, or they will kick the can on deciding. But again, we think we'll win our fair share.

Thanks, got it. Thanks for the color.

Abhey Lamba, Mizuho Securities.

Thank you. Rick and Tom, in your outlook for the hospitality business, you're assuming revenue growth to be in line with passengers boarded. You just posted about 4 points of external growth in 2014. And historically, you also -- I think your revenue growth [is all about] passenger boarded. So can you talk about the puts and takes for 2015 that would talk about the impact from existing customers -- leverage from existing customers?

I mean, yes, on the passenger boarded side, we said plus or minus the industry growth rate. So the industry growth rate, at least -- again, I'll go back to Boeing and Airbus forecast -- is about 5%. In 2014, we're at about 7%, so better than market.

This year we expect, as Rick mentioned, the first three quarters to be a little bit south of that 5%, mainly because we have one customer migrating to a pure low-cost carrier model with a different type of reservation system. And then we expect a pick-up in fourth quarter, based on our implementation pipeline. So it's going to be a little bit of an uneven walk to get to the 10% or so passenger boarded that we forecast for 2015.

Got it. And given the implementations deal that you mentioned, should we expect growth rates to accelerate into 2016 and 2017, as you are adding more customers toward the end of this, and the American Airlines roll-out is happening later on?

Yes, absolutely. That's, again, why we believe it's quite supportive of our medium-term targets of 12% to 14% growth overall. We've set the stage for that. And the beauty of this business is, you win these big reservation deals, you've got the contract, you start the implementation. So that aspect -- it looks pretty good. And you can pencil that in your models in 2016 and 2017. The timing can vary by a few weeks or quarters, as Tom mentioned, but we're solid on that.

Got it. Thank you.

Good. Thank you.

Thank you. I'd now like to turn the conference back over to Tom Klein for closing remarks.

Well, thank you again, everyone, for joining us for the call this morning. We appreciate your interest in Sabre. And we look forward to speaking to you again sometime soon, including at our upcoming Analyst Day on April 2 in New York. We hope a lot of you will be able to show up for that. Thanks a lot, and have a great afternoon.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.