Sabre Corp (SABR) 2015 Q3 法說會逐字稿

Good morning and welcome to the Sabre third-quarter 2015 earnings conference call. Please note that today's call is being recorded and also being broadcast live on the internet over the internet on the Sabre corporate website. This broadcast is the property of Sabre, any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the Company is strictly prohibited.

I would now like to turn the conference over to Senior Vice President of Investor Relations, Mr. Barry Sievert. Please begin.

Thank you, Latoya, and good morning, everyone. Thanks for joining us today for our third quarter earnings call.

This morning we issued an earnings press release which is available on our website at investors.sabre.com. The 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.

Throughout today's call we will be presenting certain non-GAAP financial measures, which have been adjusted to exclude expenses and other gains or losses related to restructuring, litigation and tax matters and certain other items. The most directly comparable GAAP measures and reconciliations are available in our 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, disclosures of our guidance, including revenue, adjusted EBITDA, net income, cash flow, CapEx, and earnings guidance, our expected segment results, the implementation and effects of recent agreements, products or acquisitions, 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 conference call. Information concerning the risks and uncertainties that could affect our financial results is contained in our SEC filings including our form 10-Q for the quarter ended June 30, 2015 and our form 10-K for the year ended December 31, 2014.

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 SVP of Finance. Tom will start us off with a review of our strategic and commercial performance. Rick will then offer perspective on our financial results and the forward outlook, before turning the call back to Tom for closing remarks. We will then open the call to your questions.

With that I will turn the call over to Tom.

Thanks, Barry. Good morning and thank you for joining us today for our third-quarter earnings call.

As we hit the home stretch going into the fourth quarter it's clear that our focus on innovation and operational intensity has driven sustainable momentum that we expect to carry us into 2016. We're the leading innovator in the industry and our results demonstrate the value of that innovation for our customers and for Sabre.

In airline solutions, we've generated more than $350 million of contracted sales value from new solutions launched since our IPO. Importantly, we've built many of those innovations to the NDC XML standard to meet the emerging needs of our customers in critical areas like retailing, personalization, and data and analytics. That same spirit of innovation is resulting in new capabilities for our hospitality customers with new solutions like the SynXis Enterprise Platform and the SynXis Booking Engine in-context suite. We are helping hoteliers achieve their revenue, brand and operational goals.

Hoteliers have responded to our unique value proposition as evidenced by wins through September at 200 plus customers representing more than 1,200 properties. These customers include leading hoteliers like Fontainebleau Miami Beach, Four Seasons, Oakwood Worldwide, Oakwood Asia Pacific, and Banyan Tree Hotels. And our progress with largest hotelier in the world, Wyndham Hotels, continues to go well.

It was best said by Wyndham CEO Steve Holmes on their recent earnings call. This is what Steve had to say. Quote, after successful pilots in this summer and spring, we began the rollout this month of the property management system and are well on our way towards achieving full implementation by the end of 2016. We're also well into planning for the migration of the Wyndham Hotel Group's four central reservation systems into one Sabre system and we will begin moving our first brand to the new system later this quarter, unquote. All of this reinforces our position as the leader in next generation hospitality technology.

During the quarter we implemented solutions for 600 hotels around the world and continued to build on our sales implementation pipeline. Now continuing on the topic of implementations for a moment.

In airline solutions we completed the technology merger of the American Airlines and US Airways reservation systems on October 17. American Airlines carries more than 190 million passengers annually, making them the largest customer in the SabreSonic community and the largest airline in the world. This highly sophisticated migration involves system integration, data migration, extensive testing to allow for the sunset of the US Airways system just after midnight on October 17 and the immediate operability of the SabreSonic system across the world's largest airline.

Our team did an outstanding job in deep collaboration with American Airlines personnel to ensure a successful technology merger that meets the needs of American Airlines and their customers. This initiative was close to flawless, arguably the most successful technology merger the industry has ever seen. It's proof positive of our ability to take lessons learned, our own and those of the industry, and apply them to make our business better and, of course, a great demonstration of our ability to execute unique large-scale projects.

And as recently announced, we are following up that great work with American by being the first GDS to implement American's paid seats into the Sabre Travel Network through the NDC XML protocol. As we discussed, we expect our revenue growth in airline and hospitality solutions to step up in 2016 to the mid-teens due to the American Airlines and other implementations.

Our contracted implementation pipeline for SabreSonic and broader portfolio deals includes Alitalia, Air Berlin, Copa Airlines, Air Seychelles, Air Serbia, and LATAM. These airlines will bring an additional 110 million annual passengers boarded to the SabreSonic platform, bringing the total incremental passengers boarded, including American Airlines, to 300 million on a 2015 base of approximately 560 millions. And we also have a large pipeline of hospitality implementations in addition to Wyndham.

At Sabre Travel Network on July 1, we completed the acquisition of Abacus, giving us a leading position in Asia-Pacific, the world's largest and fastest-growing region for travel. With four months of integration activity under our belt, we're executing on three areas of opportunity.

First, we will better align investment with our highest growth priorities. Prior to our acquisition, the Abacus joint venture had 12 voices with a myriad of priorities. With our priority in Asia-Pacific now being crystal clear, we will grow by providing innovative technology and the best service model in our industry. And we will better align investments in markets like India, where we believe the joint venture lacked optimal exposure.

Secondly, we've immediately strengthened our value proposition to the world's large global travel management companies and corporations. This is a customer segment in which Sabre has historical strength and we are already seeing traction in discussions that bring consistency to our global value proposition.

And third, Asia-Pacific, as I said, is the fastest-growing region in the world with expected growth rates of 6% to 9%. Based on our capabilities, we see opportunities to increase share and we expect above market growth rates over time. The integration work is going very well.

Because Sabre already served as a technology backbone for the business, our technology integration is relatively straightforward. The bulk of the work has been related to implementing our sales and account management processes and disciplines, branding as Sabre across all markets, getting the right organization and skill sets in place and, as I mentioned earlier, aligning our investments with our biggest growth opportunities.

In the third quarter, on a like-for-like basis, Sabre Asia-Pacific bookings increased 6%. The macroeconomic slowdown in China has impacted some markets, but overall the region continued to see growth in the range of our expectations.

Turning to the third quarter, results were in line with our expectations, positioning us for strong full-year results and a great setup for 2016. For the quarter, total Company revenue was $785 million, a 17% increase. Adjusted EBITDA increased 12% to $242 million. Adjusted earnings per share for the quarter increased 26% to $0.29. Airline and hospitality solutions revenue grew 5% and adjusted EBITDA grew 4%.

As expected, growth in the third quarter was driven primarily by growth in our installed base. We anticipate re-acceleration of top line growth into the mid-teens in 2016 when we begin to recognize the full run rate benefits of the American Airline implementation and as we execute on the implementation pipeline that I mentioned earlier.

In travel network, revenue increased 22% and adjusted EBITDA grew 19% for the quarter. The July 1 Abacus close and continued growth in North America and EMEA were tempered by some declines in Latin America, especially in Brazil, as well as continuing softness in Venezuela. Globally our third-quarter share was up, it was 37.1%, that's a 1.1% point gain from the year-ago period.

The strong operational performance, our customers' positive responses to our solutions and our forecasted growth that has already been contracted, are all affirmations of the discussions we've had with you about our Company. A technology Company that has recurring revenue, good visibility into future revenue and the ability to grow revenue to the high single digits on a global scale over multiple years.

During the first nine months of the year, we improved our competitive position, we strengthened our business through divestitures and acquisitions, we've innovated at a pace unmatched in the travel sector and effectively executed at scale on mission-critical customer projects. I believe we are very well positioned for continued strong growth rates going forward and we are very focused on carrying our momentum through the end of the year and into 2016.

With that I'll turn the call over to Rick for some additional commentary on the quarter and the forward outlook.

Thanks, Tom. Looking more closely at airline and hospitality solutions in the quarter.

142 million passengers were boarded using our SabreSonic reservation system, a 4% increase year over year all from our installed customer base. Airline and hospitality solutions revenue grew 5% for the quarter to $219 million. Contributing to the rise in revenue was an increase in our airline customers passengers boarded and continued strong growth in Sabre Hospitality Solutions.

Adjusted EBITDA increased 4% to $85 million resulting in an adjusted EBITDA margin of 38.9% for the segment, essentially flat year-over-year.

In Travel Network, bookings increased nearly 30% in the quarter. Growth was driven by the full quarter of Abacus, now Sabre Asia-Pacific, as well as strong growth across our base business. So excluding the positive impact of the Abacus acquisition, global bookings increased a strong 6.5% in the quarter.

North American bookings growth increased 6% in the quarter and our strong momentum continued in Europe, Middle East and Africa, where bookings, driven by new agency conversions and solid share gains, increased 15% in the quarter. This is compared to 2% in the region overall.

As Tom mentioned, on a like-for-like basis, our Asia-Pacific bookings increased 6% despite the slowing Chinese economy and some resulting impact on travel in those parts of the region. In Latin America, continuing weakness in Venezuela and Brazil led to a 4% decline in bookings year-over-year.

So supported by our strong overall bookings growth, Travel Network revenue increased 22% and adjusted EBITDA increased 19% in the quarter. Excluding the impact of consolidating Sabre Asia-Pacific, Travel Network revenue increased approximately 7% in the quarter. Moving to Sabre's overall income statement, the big third-quarter growth drivers were the acquisition of Abacus and strong growth in core Travel Network and Hospitality Solutions.

So a quick recap of our consolidated quarterly results. Revenue was $785 million, an increase of 17% year-on-year. Adjusted gross profit totaled $347 million, an 18% improvement from the same period in 2014.

Total adjusted EBITDA increased 12% to $242 million. Adjusted EBITDA grew slower than revenue due primarily to the Abacus consolidation and integration and as well, some cyber security expenses. Adjusted net income grew 29% to $81 million and Sabre consolidated adjusted earnings per share were $0.29 for the quarter, up a strong 26% year-over-year.

Moving to the balance sheet and cash flow, from Sabre consolidated adjusted EBITDA of $242 million, we generated $47 million of free cash flow, an increase of 40%. Year-to-date, we've generated free cash flow of $187 million, well on our way toward meeting our annual guidance of $240 million.

Total adjusted CapEx for quarter three was $95 million including capitalized implementation costs of $20 million. Implementation fees collected from customers totaled $27 million. We continue to expect capitalized implementation costs and upfront implementation fees collected to roughly offset each other for the full year.

Total net debt was $3 billion as of September 30. That reflects the strong free cash growth and the proceeds from the Travelocity sale offset by the funds used for the Abacus acquisition. Our net debt to trailing 12 months adjusted EBITDA ratio at quarter end was 3.3 times.

Regarding our forward outlook, our strong first half allowed us to raise our full-year guidance after quarter two. With Q3's solid results coming in as expected, we are able to confirm full-year 2015 guidance while narrowing the range. For the full year, we expect Sabre revenue of between $2.955 billion and $2.975 billion.

In airline and hospitality solutions we expect full-year passengers boarded growth at or slightly above the 10% growth we've previously communicated. And revenue growth is expected to be toward the higher end of the 9% to 11% range we've discussed all year.

As a reminder, again in Q4, we expect much stronger passenger boarded growth with the addition of American Airlines earlier this month. Our expectations for revenue and EBITDA growth in the fourth quarter are a bit above what we previously communicated. We now expect airline and hospitality solutions revenue growth in the mid- to high-single digits and EBITDA to be flat to up modestly year-over-year in quarter four.

The variance between Q4 passengers boarded growth and solutions revenue and EBITDA growth is primarily a function of the anniversary of a strong 2014 fourth quarter and the late September end of our previous American Airlines contract, which was running approximately $10 million per quarter. This ended more than two weeks ahead of the new solution go live as previously called out. We have very good visibility into our airline and hospitality solutions revenue pipeline and continue to expect growth to revert back to mid-teens in Q1 2016.

Moving to Travel Network, before the positive impact of the Abacus acquisition, we continue to expect strong full-year bookings growth of approximately 6% and revenue growth of more than 5%. These are well above our initial guidance this year for bookings growth of around 3% and revenue growth of 4%. Now, including Sabre Asia-Pacific, we continue to expect full-year Travel Network revenue growth of 13% or more on bookings growth of approximately 17%.

In Q4, specifically, we expect strong Sabre global bookings growth consistent with the Q3 trends and this is driven primarily by continued strength in North America, in Europe, Middle East, Africa. October has been a strong start to the fourth quarter and we expect the strength and diversity of our global travel network business to allow us to play through some pockets of macro headwinds in Latin America and Asia-Pacific as Tom referenced.

Turning back to Sabre consolidated results, you'll recall that we discussed a cyber security investigation last quarter. While our investigation is continuing, we have found no evidence of compromised ECI, PII or travel information to date.

But as you can well imagine, the investigation and remediation efforts require a surge of some millions of dollars of incremental spending above and beyond our normal course expenditures for network security and the security features we build into all of our product offerings. This surge spending impacted our third-quarter results in an amount of a few millions of dollars and is expected to have a similar impact in the fourth quarter.

While we view these quarter three and expected quarter four costs as incident-specific and limited to those two quarters, they are fully loaded in today's reported results and are incorporated in our expectations for full-year guidance. You can do the math and see that without these security-related expenses we would have been at the higher end of the range of Q3 adjusted EBITDA expectations and similarly for our full-year 2015 guidance range.

So with the continuing good operating momentum of our two segments and despite absorbing some of the mild, macro headwinds and additional security costs, we are reiterating full-year adjusted EBITDA guidance while narrowing the range to between $935 million and $943 million. Also we are narrowing our range of expectations for full-year adjusted net income to between $293 million and $303 million and adjusted EPS in a range of $1.06 to $1.10.

We continue to expect full-year adjusted free cash flow to be more than $290 million and free cash flow to be more than $240 million, with the primary difference being essentially the last of the American Airlines credits. Full-year GAAP CapEx is expected to be approximately $260 million and capitalized implementation costs of approximately $75 million.

In summary, the third quarter results were very solid and consistent with our expectations. We expect to meet our full-year 2015 guidance with continuing strong underpinnings from growth in our travel network business and that's growth in booking, revenue and share.

Our solutions businesses are performing well and as expected. This will give us additional momentum as we enter 2016 when the full run rate benefits of the continuing airline and hospitality solutions implementations really begin to flow.

With that, I'll turn it back to you, Tom.

Thanks, Rick. We've made significant progress so far this year with important competitive, financial, innovation and strategic milestones throughout the first three quarters, strengthening our Company across nearly every measure. We expect a solid finish to the year that will give us a terrific step off into 2016 as we continue to deliver innovative solutions that will enable our customers' business strategies.

With that I will ask our operator, Latoya, to open the call to your questions.

(Operator Instructions)

John King of Merrill Lynch.

Thanks very much for taking the question. I just had a couple of follow-ups on the GDS business if that's all right. So the US business, obviously, pretty strong there, another 6% in the quarter. Can you just talk about the drivers behind that? It feels a little bit above the industry growth, so are you taking share there and do you see that as been sustainable?

And then maybe on the flip side, obviously, Latin America a bit softer. How long-lived do you see that being and did it get worse through the quarter?

I guess that was the first one and then perhaps just on the pricing side of things, again, for the GDS side. I think slightly up again in the quarter, what was the driver behind the pricing in GDS? Was that mix or is there anything else you are seeing from a pricing perspective? Thanks.

Thanks, John, good morning. This is Tom, a couple things. I think in regard to North America, two things going on there. One is, yes, we are we are taking some share. We also have, as we've talked about, we have a good franchise in the corporate market, which has been strong, meaning we have a much higher share than even our natural share in the market. We have good market share with our biggest customers, so some of the strongest players in the market are growing a little bit faster than the rest of the market. So in general we've seen good lift across North America in all segments, and, again, in share growth as well as same customer growth, our share is up about two points.

In Latin America, the story in Venezuela has gotten no better and I think that's consistent across every business I read about. I think Brazil has been soft here in the last quarter and while it's hard to predict that it will get better quickly. I'm not sure that it gets much worse. They were down high-double digits, almost up in the 20%, depending on whose numbers you look at. So Brazil, pretty troubling, but I think, again, we have to global business, we have good strength across the business and other markets and we can absorb that kind of shock in some of the single-market impacts that happen around the world.

On pricing, I think we've just held pricing. I don't think there's much more to say there.

No, it's the mix. It's a good strong mix, no real big changes there.

Maybe if I can get one follow-up on the solutions side of the business, the airline solutions. Obviously, a big period of deployment now for you, but if I could just ask how's the pipeline looking? Obviously, you've got a lot on your plates, as they say, in deployments, but do you think there is more upside there from volumes or is it going to be more upsell from now on? Thank you.

I think it's a combination of both, John.

We've talked about selling into an opportunity in the market of about, let's call it 650 million or so passengers boarded, that we think are going to be out for bids in the next 18 to 24 months. We've talked about before that is a third-party consultant number that we generally agree with, so we have a very active sales pipeline across both hospitality, as well as airline solutions and we think there is more SabreSonic business to go get, as well as the opportunities to sell up across the portfolio.

Yes, and John, we would emphasize as well is remember in hospitality solutions we have two ways to expand there, both geographically, where, remember, to date our mix in hospitality solutions has been closer to 70, 30 North America versus rest of the world in terms of the revenue and, again, we see that really switching to 40, 60 over time. 40% North America, 60% rest of the world and that's a function that's both in the independent hotelier space where we built our leading position. We have a lot of room to grow in the markets outside of North America.

And then, secondly, in the enterprise space as best evidenced by the Wyndham win and some of the others that Tom mentioned. We feel that we have got a multi-year lead over anybody in that as we're first one to have cracked into the enterprise space. Again, that's a global market, really not defined so much by region.

Yes. And I will come back to one other thing I said in the script, John, and that is we've talked a lot about the 29 products that we've released since our IPO, this is the first time we've talked about revenue generation out of those products. $350 million of contract sales for brand new products, so we have the biggest portfolio in the industry, we are adding to that portfolio so we have more opportunities to sell into all of our customers sets and we're really excited about the level of innovation that the team's producing and the pace of new product launches that we have coming out of the businesses.

And all of that gives us confidence to reiterate, as we said, mid double-digit, mid-teens revenue growth starting in first quarter FY16 and for our expectations in the total year of 2016, built off of what our plan was this year to position for that. To set up and then digest that next stage of growth that comes for the positioning with implementations and selling that backlog of solutions here in 2015.

Got it, thanks.

Thanks, John.

Mark Moerdler of Bernstein Research.

Thank you very much, I appreciate it and it looks like a very nice quarter, so congratulations. On the Travel Network, margins were down a bit year-over-year, is that mostly due to the Abacus integration? How do we see that and how soon do we see that starting to change? And then I have a follow-up.

Yes, Mark, and this is Rick, indeed, you have it right. It is Abacus. Both for two reasons, one we have some expenses that were essentially acquisition expenses that we absorbed and then, as we said, that business on an inherited basis has a margin structure a bit lower than our overall and lower than what the data processing revenue was coming in on the previous. And, as we said, that on itself, Abacus would bring about a 2-point margin reduction, all else equal, when it is integrated into TN and so you saw that now given the first quarter. So it's those two things are the primary drivers for that, Mark.

Excellent. And on the airline side, again, a bit of weakness on the margin.\ Is that the predominantly all the work and effort on the American Airlines' deal or is there something else driving it?

Are you referring to the lack of positive leverage?

The lack of positive leverage, that's correct.

Overall in solutions we were at the high 30s and flat year-on-year, but, I think to your point, it is that we are observing some costs there. But also, remember, we had some of the drop off of the revenue that we were getting on the American deal before we started to get the revenue from the reservation systems. You had 2.5 weeks there of where you really weren't getting that incremental. So we won't see that flush out completely until we get to fourth quarter where we have clean comp.

That makes more sense, because I was fearing that the hospitality as it continues to inch up probably gets a little more scale, and so not like we're going to expect to see huge margin improvement. But would have thought a hair, and so that's what is driving it, the offset.

Yes, and we will see that over the midterm arc here, absolutely. But rest assured, we are investing appropriately and strongly into hospitality right now where we have that lead and some of that actually is in there in the quarter as we're ramping up for and implementing Wyndham. As was characterized by their CEO, as well as, for instance, Four Seasons. You need to do that before you then get that benefit of increasing margins where you start to see it really materialize in hospitality. And that's exactly where we are and that's exactly where we are and that's our midterm expectation.

Beautiful. One more quick question. On the hospitality side, you're still seeing the lead you have in competitive, from a competitive point of view, maintaining? Do you see anything, any changes in that respect, any ability to be able to expand the lead?

Yes. Mark, I just don't think anyone out there is doing the types of things that we're doing, and Stephen Holmes' comments were a great validation. As I said on either the last call or the one before that, we sign these contracts, the PMS, the property management system contract we signed late in 2014 and we are implementing those properties right now.

We are starting to see revenue from that contract right now and, as Stephen said, they have four central reservation systems that are consolidated to our system and we will start to see revenue from a contract that was signed in first quarter of FY15 and fourth quarter of FY15. Competitively, we've seen announcements multi-years ago that are not producing revenues today. So I think we just have a very big advantage in the market. We need to work hard to keep that advantage and that's going to be through executing on things like Four Seasons and Wyndham, as well as the many other implementations we have across our customers and also continue to innovate.

But we have real product that's going to customers today and producing revenue today on a base of very good business. We've talked about the broad set of brands that we have, especially in the luxury segment with brands like Shangri-La and Mandarin Oriental customers that have very high standards and we just continue to win in the marketplace and we really like this business. We think we're redefining the space.

Excellent, thank you very much.

Ashish Sabadra of Deutsche Bank.

Hi, good momentum in the Travel Network business. Good to see that solid momentum going there. On the solutions side, as well, I was just wondering if you could help us parse mid-single-digit growth and that's going to expand going forward and good to hear about mid-teens growth in the first half of next year. Just help us parse the difference between the reservation business with its commercial operation and the hospitality. How should we think about the underlying growth drivers?

On airline solutions we had passengers boarded growth was on the base, right? That was the 4% growth there on the installed base in the quarter, as you would expect and then that steps up into the 30% range once we layer in American Airlines. So that was as planned and, again, the revenue as planned there. We've talked about all year how this is -- we've digested a step function change of implementations that happened a couple years earlier.

We had no implementations up to this point go live in airline hospitality until the recent October 17 American Airlines. And then you will start to see that benefit those growth rates. And on hospitality, it's a little less lumpy in that regard because the implementations come in a timeframe rather than an Iron Curtain cutover as they do in airlines. And that was best exemplified by the Wyndham comments of how that is layering in there.

So again, it's a spot on plan. Again, it has the benefit of the business there with good visibility, recurring revenue. When we sell in solutions, we have a very good handle on when those are going to start to drive the metrics of whether they are passengers boarded, hotel rooms, reservations made and then, therefore, revenue. Q3 came in really spot on with what we expected and just a little bit even better in solutions. We like that attribute and then it gives us great confidence of how that will step up in the first quarter 2016 and the fourth quarter. Again, we have very good visibility and, therefore, the ability to layer in the full-year guidance.

That's great comments, Rick. Just quickly, Lufthansa on their earnings call they mentioned that they are not seeing any headwinds in their home market, but they are seeing headwinds in the international market. From your vantage point of view, have you seen any impact from the Lufthansa distribution charge?

I'm not going to talk about specific impacts on any of our customers. I will say this. I've for 20 years now sold software to airlines that helps them optimize their business and consulting services for them and have a very strong view that when you're not price competitive you lose business, and I think that holds true across this industry and most industries. That's what we believe.

For our business, obviously we've talked before, that Lufthansa Group overall accounts for less than approximately 2% of our bookings and, again, we think those are staying primarily in the GDS, whether they stay on Lufthansa or move to other competitive airlines due to price, as we've talked before. So nothing new to add there and we had a great Q3 in Travel Network overall and we expect a strong continuation in Q4, as I said, along the same trends as Q3. We are already deep into our midterm target range of that 4% to 6% top line growth, and feel real good about the state of that business.

That sounds great. One final question for me was about the instant bookings like trip announced an instant booking deal with Priceline, as well as instant booking with Wyndham. I just was wondering if you could provide your thoughts around puts and takes for your GDS, but more importantly for your solutions business. What does that mean, if anything?

I think for our solutions business it's opportunity to provide, in this case, our hoteliers with another alternative channel for distribution. And there's a lot things being tried in the hotel space around diversifying channels of distribution. There are some channels that are quite robust and I think hoteliers would like a little more balance in their distribution overall. They have a lot of concentration, many of them do, in some areas that they would like to change. So it is an opportunity for a hospitality solutions business. I don't think that it has much impact on our GDS business since it's targeting a different set of customers.

That's great, thanks.

Jim Schneider, your line is now open.

Hey, Jim, you there?

Good morning, thanks for taking my question. Sorry. I was wondering if you could maybe talk about your expectations for the evolution of EBITDA margins in the solutions business over time. Clearly, you have got some implementation costs ahead of new wins ramping up, so how should we think about whether those implementation costs roll off as the new revenue comes on and could you talk maybe talk about the longer-term objectives for solutions margins and where those could go?

Yes, happy to, Jim. Let's step back, again to 2013, we had in the solutions group, that's airline and hospitality segment, EBITDA margins of about 30% and we said those would over the period of FY14, FY15, FY16 and then moving into FY17 move to the mid-30s and then to the high 30s. For this year we expected to be in the mid to upper-mid-30s. We've been right on that and then be operating in the high 30s for the full year by FY17. But that not being a cap on where we can go. Because, again, we're getting these new -- each time we are getting a small step change function in the run rate of the overall sustainable margin.

We had a great margin in Q3. That was already in the high 30s. I mentioned before, don't get too carried away with one given quarter, and really expect to be in that upper-mid-30s here as we go across the rest of this year and then into FY16. Stepping up then as we start to get the benefit of these implementations and digest that next level of investment into it. But, again, you look at our model and the continuing increase in scale that we are getting with that as the solutions business becomes a $1 billion plus business that's growing at scale at a 12% to 14% rate over the medium term.

There's no reason why, given those facts and where we are, specifically, and then more generally looking at more analog software SaaS businesses that you absolutely have the possibility and should be able to drive this into the 40s. So that's how we see that.

That's helpful, thanks.

And then maybe, Tom, just follow up. In terms of 2016 and the pipeline of potential new customer wins on the solutions side you could see coming on, can you maybe talk about any kind of quantitative numbers of new customers that might be coming up for a bid in the next year, or certainly over the next few quarters, that you have visibility on that could drive the longer-term growth?

Yes, Jim, I'm not going to get too far into FY16 here. I think I will just stick with what I said earlier. We're selling into what we think is about somewhere in the neighborhood of 650 million passengers boarded. That means that those conversations could be fairly mature where we've already put an offer on the table and it's being evaluated, to people that we're working on who might not be serious about a conversation until sometime into FY16 or even into FY17. I think it's a early to be talking about FY16. We'll just plan on doing that maybe later this year.

I want to reiterate, though, we like our competitiveness, right. And we have the ability to be in and evaluate every deal essentially out there as we are one of the clear leaders there, and then have the ability to sell other solutions around any reservation system whether they are using our SabreSonic reservation solution, whether they are using an internal legacy system or they're using one of our few competitors' systems.

Thank you.

David Togut of Evercore ISI.

This is Anthony Cyganovich on for David. In the travel network business you continue to gain market share in EMEA. How sustainable is that over the next two years and what are the drivers?

This is Tom. I think it's very sustainable. We've been at it for a couple years now, and we've said 1.0 point to 1.5 points, but I think at some points we've recently been above that. But we think that 1.5 to 2.0 points a year is achievable. We think we have the right product for the European market and the Middle Eastern market. We are under weighted in places like Africa and in some markets in Europe, where we haven't participated as fully. We've talked before, we've opened a dozen new markets here in the last 18 months and we should start to see fruit from those investments.

We feel very good about being able to continue to grow our share there. We think we're competitive everywhere in the world. We expect, as I mentioned earlier in my comments, we expect better than market growth in Asia-Pacific over time as we get our integration work done. We feel like we can take share everywhere in the world and we should continue to see strength in EMEA.

Okay, thanks. Just a quick follow-up, could you quantify the expense associated to the cyber security investigation?

Yes, as I said, in third quarter it was some few millions of dollars; expect the same in Q4. So what's a few million mean, it means it's a little more than $3 million and less $5 million.

Okay, thanks a lot.

Brian Essex of Morgan Stanley.

Good morning and congratulations on American. That's huge. I know we were all watching the news that weekend. No news is good news, so good job.

No news is good news is right, Brian, thanks. Thanks for the acknowledgment.

That was definitely a big undertaking so understand the effort that must have taken.

Question on Abacus, as we look at the Asian market and we're adding this into our models, could you help us understand maybe the pricing that you have in the Asian market and how that compares to the other regions and how we might think about -- I understand administratively you had some duplicative costs, but how is it on the pricing and gross margin front in that region?

Yes, Brian, thanks for that. As I've said before, in the four regions it goes as follows. The North American is the most competitive region and, therefore, has the lowest gross booking fee and lowest net booking fee. And on the other end of the barbell you have the Europe, Middle East, Africa market that has the highest both gross fee and net booking fees. And right in between you literally have Latin America and Asia-Pacific that sit similarly with one another in between those two barbells.

That's what it's been in Asia-Pacific. Now, our TN Sabre Pacific market, there isn't any change in that because we acquired it fully. And then in terms of the gross margin and the operating margins, as I mentioned before, it is at a little bit of lower level than what our overall businesses is and has that all else equal two point drag on our segment margin in travel network that I talked about.

But, again, what we're going to do is work to try to improve that on the areas that we can in terms of G&A costs and also some of the costs related to how you deliver the technology after we do some one-time surge spending, as we've talked about, some CapEx, to get the investments in the right order, the right priorities that Tom talked about. So we have opportunity to try to work that.

I've identified some of the synergies that we expect to get from that that will come in fully in FY17. So we really need to get through, since July 1, Q3, Q4 and across FY16 before we should be talking about any kind of possible difference in what the margin profile is. Hopefully that addresses both your pricing question and the margin question.

Yes, that's helpful. I had a follow-up on hospitality. One of the things, certainly since the IPO, that has been a pleasant surprise is the number of luxury logos that we've seen come out of your pipeline.

I was wondering if you could maybe discuss, and I understand some of this is new functionality that you've rolled out since then, but how do we think about luxury versus maybe the older, lower-end mix of hotels you may have in there and the incrementally -- what incremental margins can we expect from those deals and maybe help us understand what are the most popular features that are incremental to the platform that are being adopted? Whether it's loyalty programs or what have you. Just to wrap some context around some of the deal velocity we see coming out of your pipeline and how that might affect the mix and incremental margin in that business?

Brian, let me just start with the customer set, which we've highlighted and I have often highlighted some of these known luxury brands, because we really do have a terrific representation of customers there. I also think those customers have a very high expectation for service and how to use the technology to service their customers, so they are a good representation because they really use the full functionality of the systems that we provide.

But we're certainly not limited to that segment and we're selling into the select service brand. Certainly Wyndham has a terrific mix of hotels, many of them in that select service or value segment, and they will, again, use our systems in a very robust way. I think the things that are highest on the radar of hoteliers today are, one, how can they use technology to engage with their guests in a different way and to change the guest experience and we spend a lot of time on talking with our customers about how to use both their direct distribution channels, their websites, their voice channels and their indirect distribution channels to have a good picture of who their customer is, where they're coming from, what they are shopping for. So they understand them better and when they get to the hotel they are able to service them better based on just deeper insights into who the customer is and what they were looking for when they were buying.

I mentioned the in-context booking engine that's Nexus released in my remarks and that is one where, again, a hotel is able to provide offers to the customer based on where they are in the website. So if someone is tipping their hat on what they're looking for, so if they are looking at the family fun section of the website, they don't have to go back to the buying page to get the room. They could buy something right off of that page that they are looking at and often with a special offer that is targeted to a family. Or if they are on the spa page they might have a special spa offer. But, again, stimulating the sale, and you see conversion rates really go up when you can provide that in-context experience. That's places where we are winning and innovation that we've delivered that our hoteliers are not seeing from some of our competitors.

And then I think finally, on the property management system side where we are in the select service segment that is really our target there. It's the place where there's the most hotels, it's also the place where growth is highest. Really changing that property management system. Again, so that the desk agent can engage with the guest in a different way and has a full picture of who the guest is when they come into the hotel, no matter what segment we're serving.

I think hoteliers really believe that the guest experience is going to change based on technology and our ability to talk about that with those luxury brands but also, again, the biggest hotelier in the world is Wyndham, who has really all segments of brands, to be able to talk to them about how they want to use technology going forward is really what's generating innovation in the investments that we're making to allow them to, again, deliver to their strategy and be able to change the experience for their customer.

And where we are with this ability to deliver technology, it gives them that insight. It gives them revenue management, gives them additional revenue efficiencies that Tom mentioned. That exists both in the luxury and the select service side, and so we are really pressing our advantage there, our existing advantage and the advantage that we think we've opened up on the enterprise side.

So we're going to continue to really smartly invest into that and push harder rather than less when it comes to driving the sustainable biggest revenue pie for us and the growth there. And that will be through the investment that we are doing organically to develop those products and those features that Tom mentioned and build that next level of scale in the platform and we're selectively looking at and doing acquisition in the hospitality space as well, both for product feature or scale acquisitions to the extent they might be available.

You asked a little bit too, again, Brian, about shape of margins and revenue velocity there. We are focused on having that product in technology solutions set to give us the biggest opportunity for revenue growth across the biggest addressable market. The margins are coming up, as I talked about earlier, and getting some of the benefit of scale already over the interim arc, but we are not going to in the short term err on the side of managing the margin up for a couple of quarters at the expense of what we think is a growth opportunity that we can play into better than anyone else.

Very helpful, thank you.

Greg Moskowitz of Cowen and Company.

Thank you and good morning. You provided organic travel network bookings growth, which was helpful, just wondering if you could tell us roughly how much revenue and EBITDA you recorded from Abacus in the quarters as well as what your expectations are for Q4.

Actually we do have that, I can point it out to you, you will see that in the queue, and if you give me just a minute here. I don't have it off the top of my head but we do have it here. Impact to Abacus, we had approximately $70 million, $75 million incremental revenue was the impact there and a little over $20 million bookings. We had the typical flow-through that you would expect on EBITDA there. So, again, if you exclude the impact of consolidating Abacus, Travel Network revenue bookings and EBITDA each grew in the range of around 7% plus or minus, as I indicated earlier.

Okay perfect, thanks for that. And then just a clarification on the cyber breach from last quarter, are those few millions of dollars expense going into corporate overhead or is that cost or some of that cost being allocated to the travel network and solutions?

Corporate. Good question, that explains then the question why did that pop up. So thanks for that clarity.

Absolutely. Thanks.

Appreciate it, Greg.

Jack Kelly of Oppenheimer, your line is open.

Great. Thanks for taking my question. As you start to implement and complete more hospitality contracts, where is management on providing more lodging metrics possibly for 2016? And secondly, has completion of the Expedia-Orbitz acquisition, has it impacted any share gain particularly on Orbitz?

Why don't I start with the second question. It hasn't to date. As many of you know, we're the largest provider of global distribution services to Expedia. We have been for a long time and we expect to continue to have opportunities there. But we did have some legacy business with Orbitz that we continue to service but we haven't seen a step up in that business since the completion of the acquisition.

As it relates to the hospitality implementation, I think as the business gets bigger we will start to try to provide metrics that give a little more insight. It's not as clean from a standpoint of, as you all know, the airline industry self-reports many of these metrics that we talk about, so things like passengers boarded are easy to see and they are accurate because the airlines self-report them at the end of every month in traffic reports.

They are not any similar metrics in the hotel business. So it's just a little harder. We are not paid on things like ADR, which you look at if you're a hotel analyst. We don't get paid based on the rate that they spell, we get paid on rooms booked in most cases. So we will try to give a little more clarity, but they're just not as easy to compare because of the lack of industry level reporting.

Additionally, until we get critical mass in both the independent, the enterprise, there can be a range. So averages sometimes don't tell you much in that and we are working to try to give you what we can as we talk about FY16 and FY17, and get a little bit more scale there and then can start to report some things that on average are enlightening rather than possibly misleading.

Thank you.

Abhey Lamba, Mizuho, your line is open.

Yes, thanks. So, Tom, revisiting some of your comments about the hospitality business, especially for large enterprise deals, one of the promises of Wyndham deal is that it can open doors for you in other large hotel chains. I understand that we're not going to see those deals every quarter or every other quarter, but they have long sales cycles. But any early feedback from the field in terms of how that pipeline is developing, and is that helping you in getting into some of the other larger enterprise deals?

Thanks, Abhey, I appreciate the question. We followed up the Wyndham deal with a win at Four Seasons and they are certainly prominent and have a very different set of needs, so they've been a great partner as far as where they think we need to take some of our products sets as we've started to implement their properties. The broader pipeline for enterprise, as you said, I'd say it is early in development, but the success that we've had has gotten people's attention, and we're having fairly robust conversations with a number of enterprise customers.

I think those deals will take a while and, as you said, they won't be every quarter. There's about, let's call it about 20 brands out there that we consider the enterprise segment and I would say we're talking to all of them.

Got it. And as you look at the rollout schedule of these new airline and hospitality implementations, when should we get the full impact of all the commitments that you have? Is it by the end of 2016, or can the revenue growth exploration that we're going to see next year continue into 2017, as well?

The pipeline of implementations that we have on the airline side today creates good growth in FY16, but also good growth into the first half of FY17 we'll see implementations. So really FY16 and FY17 we will see nice growth step ups from the implementation pipeline we've built that is already contracted on the airlines solution side.

So that will roll in over that time period. We think we will be done by mid-FY17 and, again, as we start to talk about 2016, we will begin to firm up some of those schedules to give a little more insight into exactly when carriers are scheduled for implementation or at least the quarter that they're scheduled in. And then, as I mentioned on hospitality, the Wyndham deal is going well and it starts to implement on property management now and then on central reservations towards the end of this year.

Got it, thank you.

Jason Kupferberg of Jefferies.

This is Ryan Cary for Jason. Most of my questions have been asked, just one more. Looking at the Asia-Pacific region we saw some reports during the quarter that air travel out of China actually decreased for the first time in a number of years in both August and September and that outbound tickets booked to Europe and North America for later in the year were way off, as well. Well, I know, in general the China market is relatively locked up. It sounds like you may have seen some of the same trends during the quarter, but I was wondering if this is something we could continue to see for a couple quarters more, or if you think it is a one or two quarter dip rather than a more lasting trend.

This is Tom, I'm not going to speculate on how long the trend in China will last, but I think what you said is accurate. The business ex China, and look, China is complicated, there's a couple of different markets that I'll talk about here. But the pure business coming out of China is locked up in a state-owned monopoly, that's both on the airline reservation side and the travel distribution side. So we don't really participated travel sold and ticketed in China.

There's an emerging market of Chinese business that's sold outside of China in countries that are close to China and we are participating very well in that part of the market. We saw a little bit of softness there, but not as much, and we suspect that there may be customer profile differences between the buyers who are buying tickets in places like Hong Kong or Taiwan or Singapore, other places around China, maybe a slightly different market than the bigger Chinese local markets.

We are still learning our way through it, but we do participate well in Chinese business that's sold outside of China. As Rick mentioned, we saw some softness in some markets that have some Chinese dependencies, but we didn't see anything that was alarming or big dips that we thought we couldn't make up in other markets.

Great, thanks for taking my question.

At this time I'd like to turn the call back over to Mr. Tom Klein for closing remarks.

Thank you very much. I wouldn't typically do this but I think, I do want to congratulate our Sabre team and the American Airlines team on a job well done. It was an extraordinary effort and they should be recognized. So, Brian, I appreciate you bringing it up.

Thanks again for joining us on the call this morning, we are pleased with the results so far this year and expect solid full-year results and increased momentum as we enter into 2016. We appreciate your interest in Sabre, as always, and we look forward to speaking to you again soon either in person or next quarter on this call. Thank you very much.

Thank you, ladies and gentlemen, this concludes today's conference, you may now disconnect. Good day.