Sabre Corp (SABR) 2016 Q4 法說會逐字稿

Good morning, and welcome to the Sabre fourth-quarter and full-year 2016 earnings conference call.

Please note that today's call is being recorded and is also being broadcast live 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 will now turn the call over to the Senior Vice President of Investor Relations, Mr. Barry Sievert. Go ahead, sir.

Thank you, Matt.

Good morning, everyone. Thanks for joining us for our fourth-quarter and full-year 2016 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 that Sabre IR webpage. 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 restructurings, litigation and tax matters, and certain other items. All references during today's call to EBITDA, EPS and net income have been adjusted for these 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, disclosures of our guidance, including revenue, EBITDA, net income, cash flow, CapEx and earnings, our expected segment results, the effects of new or renewed agreements, products, implementations and acquisitions, our expectations of industry trends, and other 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 result is contained in our SEC filings, including our third-quarter 2016 Form 10-Q and our 2015 Form10-K.

Participating with me on the call today are Sean Menke, our President and Chief Executive Officer; Rick Simonson, our Executive Vice President and Chief Financial Officer; and Chris Nester, our Treasurer and SVP of Finance. Sean will start us off and provide an overview of the state of the business and outlook, as well as a review of our strategic and commercial performance and outlook. Rick will offer additional perspective on our financial results and forward outlook. We will then open the call to your questions.

With that, Ill turn the call over to Sean.

Thanks, Barry.

Good morning, everyone. It is great to be here, and I look forward to getting to know many of you in the months to come.

I want to start off by recognizing my 10,000 Sabre teammates around the world. Their dedication and commitment is what makes Sabre a truly great Company. I'm extremely appreciative of their hard work and want to quickly thank them before we get started.

Let me now provide you an overview of what we will cover today. First, a recap of the fourth-quarter and full-year results, with a look at where we met or exceeded our expectations and an honest appraisal of where we fell short. Then we will discuss the CEO transition and what you can expect from us going forward in 2017 and beyond.

The high-level summary of the fourth quarter is pretty straightforward. The booking strength we saw in October continued through the quarter as expected, and Travel Network revenue and EBITDA were at or above our expectations. In Solutions, overall growth was a bit below expectations. Hospitality Solutions continued to post strong growth, both organically and through the benefit of our recent acquisition.

The SabreSonic and AirVision/AirCentre portfolios also delivered solid double-digit growth, consistent with our expectations. We fell a bit short of forecasts in Solutions overall, however, due to a shortfall in the relatively small piece of Airline Solutions revenue tied to discrete professional services.

So for overall Sabre, this results in total Q4 revenue increase of 9%, driven by 7% growth in Travel Network and a 15% growth in Airline and Hospitality Solutions. Adjusted EBITDA, up the same amount as revenue, at 9% year over year. With an upward adjustment to our full-year tax rate that reduced EPS by approximately $0.02, adjusted earnings per share in Q4 was $0.27, consistent with a year ago. Free cash flow for the quarter totaled $193 million.

Within the quarter, we had a number of important business milestones. Travel Network growth stepped up as expected, driven by improved travel market growth and agency conversions. In Solutions, highlights included Alitalia going live on SabreSonic Reservations, part of a broad adoption of Sabre technology; the implementation of our new Crew Management solutions at Silk Airlines; and American Airlines transitioning to our inventory solutions.

Among new wins in the quarter, China's Hainan Aviation Group contracted for our planning and scheduling solutions, and Aeroflot became our latest revenue optimizer customer. Successful implementations at Wyndham continued with over 3,300 of their properties now live on our Property Management Solution. We also went live with Ramada brand on central reservations in the quarter. As you have seen from our recent press release, we had a great new global digital platform win at enterprise hotelier, Carlson Rezidor, with over 1,400 current properties and a strong growth ambition.

Let's quickly review our full-year 2016 financial performance.

2016, overall, was a year of strong growth for Sabre. Total full-year revenue growth was 14%, including Travel Network growth of 13%, and Airline and Hospitality Solutions growth of 17%. Our Solution Software business eclipsed $1 billion in revenue for the first time and now represents 30% of total Sabre revenue, up from 23% just five years ago.

Adjusted EBITDA increased 11% and also crossed the $1 billion mark. Adjusted EPS increased 19% and free cash flow was $372 million, 53% above 2015 levels.

Now Rick will give you more the normal granularity on the Q4 results before turning to what we see ahead and in 2017.

Thanks, Sean.

At Airline and Hospitality Solutions Q4 revenue increased 15% to $266 million, driven by 10% revenue growth in SabreSonic; mid-teens growth in AirVision and AirCentre; and Hospitality Solutions growth of well over 40%. Professional Services, which includes primarily business process consulting for airlines but also consulting work around certain implementations, declined $5 million, or 56%, from a year ago period as certain customer contracts for consulting services were not executed during the fourth quarter as planned.

Solutions EBITDA margins stepped up in the quarter to reach 38.3%, resulting in Solutions EBITDA of $102 million, growth of 19%. Full-year Airline and Hospitality Solutions revenue reached $1.019 billion, an increase of 17%. Within this, Airline Solutions revenue increased 11% to $795 million, and Hospitality Solutions revenue increased 41% to reach $225 million. Full-year Solutions EBITDA reached $372 million, an increase of 15%, resulting in a full-year solutions EBITDA margin of 36.5%. It's a bit below where we had expected to finish, due primarily to the shortfall in discrete Professional Services revenue.

200 million passengers were boarded through our SabreSonic Reservation System in the quarter, a 13% increase year over year. Passengers boarded growth on a consistent carrier basis was a strong 8% in the quarter. For the full year 2016, passengers boarded totaled 789 million, a 35% increase over 2015, driven primarily by the American Airlines implementation and strong same-carrier growth.

Q4 Travel Network revenue increased 7% to $569 million, driven by solid bookings growth across all regions. EBITDA increased 9% to $226 million in the quarter. For full year, Travel Network revenue increased 13% to reach to $2.375 billion. EBITDA was 11% higher than 2015 at $971 million, resulting in a full-year EBITDA margin of 40.9%, a bit better than the 40% we had anticipated. The improved bookings trends we saw in October continued through the balance of the quarter. Travel Network's revenue growth was supported by fourth-quarter air bookings growth of 6%, with sequentially improved growth in every region of the world.

Non-air bookings increased modestly, resulting in overall bookings growth of 5% for the quarter. Travel Network bookings was geographically broad-based. Growth was again strongest in Asia-Pacific at 7%, with 4% growth in North America, and a 6.5% increase in Europe Middle East Africa. Finally, Latin America continued its improving trend, with 4% bookings growth in the quarter.

Globally, Sabre's Q4 share of GDS air bookings was 36.8%. Our full-year 2016 share is 37.1%, 50 basis points higher than 2015.

Year-end total net debt remained steady at $3.1 billion, and leverage ticked down to 3 times, trailing 12 months EBITDA.

We returned $244 million to shareholders through an opportunistic $100 million Q4 share repurchase program, where we acquired about 4 million shares and our regular dividend payments that totaled $144 million for the year. As expected, the fourth quarter was a strong free cash flow quarter, with a number of business and working capital items contributing to a significant step up from previous quarters. In the quarter, we generated $193 million of free cash flow, resulting in full-year free cash flow of $372 million.

Quarter 4 GAAP CapEx totaled $73 million, and capitalized implementation costs were $19 million. Full-year GAAP capital expenditures totaled $328 million, and capitalized implementation costs totaled $83 million for the year. The cash outflows associated with capitalized implementation costs were offset by upfront fees collected from customers, which totaled $84 million in the year.

In 2016, return on invested capital, a key metric that we measure ourselves against internally to drive shareholder value over time, was consistent with 2015 at 9%.

There are two items included in our Q4 GAAP results that I would call to your attention. First, litigation and Other costs includes a $32 million accrual for the US Airways case, representing the jury award and our estimate of attorneys' fees relating to the litigation. Additionally, as part of our re-prioritization of resources to drive success, we have initiated a plan to restructure a portion of our global work force in support of funding our efforts to further modernize our technology infrastructure. As part of that, we took a $20 million accounting charge to the Restructuring Other line in Q4. The cash impact of the restructuring of approximately $20 million will be dealt in 2017, with the majority of that realized in the first half of the year.

With that, I'll turn it back to Sean to discuss the transition, review of the state of the business and our outlook for 2017.

Sean?

Thanks, Rick.

I feel very fortunate to be assuming the CEO role at Sabre right now. I have held a number of C-level positions over my career, mainly at airlines. But I have never been at a company that is as well-positioned to win as Sabre.

My decision to join the Company in 2015 was based on my 10-year career in the airline industry, and heavily influenced by the growing importance of technology and distribution needs and opportunities. Our focused strategy and leadership in large and growing markets provides us a platform to continue to lead in the evolution of new products and capabilities that bridge today's needs with known and unknown future demands. Anytime there is a change in leadership, it is natural for investors, customers and employees to wonder what will change and what will stay the same. So let me take a few minutes to share with you my view on our strengths and opportunities, and where I intend to focus our time and resources.

Fundamentally, I believe our current focused strategy to maximize the value delivered to our customers in areas where we have significant competitive advantage is the right one. We are global leaders in our businesses. Our belief in our long-term vision, opportunity and strategic position is stronger than ever.

Changes we will make going forward are centered on enhancing value to customers through accelerating product and capabilities into the marketplace. We will focus on increasing the clock speed of innovation and further solidifying our position at the forefront of the industry. To accomplish this, we are focused on the following.

In Airline and Hospitality Solutions, prioritization of investments will be tightly driven by the needs of our customers and our ability to deliver those capabilities faster. To accomplish this, we will be increasing investment in areas of greatest opportunity, while decreasing investment or exiting areas that are not providing sufficient returns. In Hospitality Solutions specifically, we intend to build a much bigger business.

We are global leaders in central reservations. We are hitting the mark with our customers. The potential category is large. We are well-positioned based on our technology, innovation and geographic scope. We will invest to extend our leadership role, including accelerating investment behind the development of our next-generation SaaS Property Management Solution.

The hospitality industry is hungry for innovation and choice. Our leading position in distribution and strong growth in property management give us a license to win as we expand the portfolio.

In Airline Solutions, we own the largest portfolio of solutions and a global customer base of over 225 airlines. With our proven ability to serve airlines of all sizes, we will of course focus on winning the big episodic opportunities for airline reservations. We are also focused on helping our customers slay the legacy complexity in their operations by leveraging our Solutions portfolio to enhance and expand our technology footprint across our customers operations, with focused investment that moves the industry towards true SaaS solutions.

Similarly, with the growth in our Airline Solutions product and portfolio over many years, some of that same historical complexity has crept into our own product set to some degree. We will be undertaking a critical review of our Airline Solutions portfolio. You will see our investments becoming increasingly targeted on areas of greatest customer needs and highest returns for Sabre.

Closely connected with our strategy in Airline Solutions to be an indispensable partner to our airline customers, our objective in Travel Network is to be the best distribution partner in the industry for airlines, hoteliers and other travel suppliers, as well as TMCs, agencies and leading OTAs. For airlines, distribution is about more than just direct versus indirect, and reaches all the way back to the reservation system and how products are created, bundled and sold. Our position, as both a GDS and as a provider of PSS in retailing technologies, enables us to work with our customers to optimize distribution in ways other competitors cannot.

We are working to open new sources of revenue across the value chain through enhanced ancillary and cross-selling opportunities; increased insights through data and analytics; and industry-leading backend functionality on a highly-reliable technology backbone.

As a former airline executive, I understand the importance of distribution. All forms of distribution. And the value delivered to the GDS. I am also well aware that forms of distribution, including the GDS, have sometimes fallen short.

We are laser-focused on building from our wealth of knowledge and insight to more effectively enable our global customers to evolve their business models to execute their value proposition and maximize their returns. An illustration of this is the rollout the new Sabre Red Workspace. The technology platform and use of APIs are core to this booking tool and are a huge leap forward and an indication of our clear intent to lead enhancement in innovation in the space.

During my airline career, I also spent a significant amount of time thinking through distribution alternatives. Leveraging this background, we will continue to help enable our customers to optimize airline distribution across direct and indirect distribution channels to provide the most efficient and effective ways for our supplier partners, airlines and hoteliers to sell their supplies and services in a way that extends their brand promise and maximizes revenue.

The path forward requires continued dialogue and engagement but, more importantly, the willingness of all parties to forge stronger relationships in alignment to address the road ahead. Moving forward, Sabre is committed to this evolution and will be stepping up its engagement and leadership.

At the same time, OTAs and mobile channels continue to grow. Solutions to effectively manage business travel and expenses are also growing. Business and leisure travelers alike want effective ways to comparison shop. As airline and hotel executives look to grow revenue, the answer for all parties lies in selling to all consumers wherever they might be shopping.

Under my leadership, we will continue to evolve the GDS business in the ways we know the industry needs for it to go. In the end, I expect Sabre to continue to thrive in this sector. We expect to continue to increase our global share over the coming years. We will make prudent, modest trade-offs in gross margin with a goal of driving growth and increasing share, total EBITDA and cash flow in Travel Network.

In 2016, we expected product and technology costs to grow slower than revenue. But in fact, as we have worked to improve our time-to-market, enhance our stability and security, and meet customers' needs, we have seen product and technology cost grow more in line with revenue growth. We expect this to continue in 2017.

At the Sabre corporate technology level, we are going to increase our level of investment now with an eye towards accelerating our time-to-market; improving stability and security; and with the goal of ultimately bending the long-term curve of rising technology, operating and capital costs through deploying lower costs and more flexible technologies. Investment in hardware, software and labor will accelerate the modernization of our technology infrastructure and hasten our adoption of the cloud and common, open platforms. All while ensuring our customers benefit from the highly reliable and secure technology infrastructure they expect from Sabre.

We will continue to make the appropriate decisions to ensure our product and technology organization is property aligned to execute upon our most important initiatives and do this in an efficient but expedient fashion. The summation of our collective focus on value creation requires that we improve our allocation of resources to more effectively align with our customers' needs, time-to-market and greatest return for Sabre. The heart of this is an honest assessment of our infrastructure, technology and products and how we will meet the demands.

We understand the impacts this level of spend will have on our financial results in the short term. But firmly believe they will set the stage for a stronger growth and shareholder return in the years to come. We are very focused on accountability. We want you to hold us accountable. So what does this mean for 2017 from a financial perspective?

2017 will be a year of growth, but it will also be a year of productive investment. Investment that will set the stage for more opportunity and growth in the years ahead. In Travel Network, we expect momentum to continue, highlighted by another year of share increase and solid top-line growth.

Share, revenue and EBITDA growth is based on expectations for a supportive macro-environment, the global rollout of the new Sabre Red Workspace in the first part of the year, and a scheduled agency conversion in the back half of the year. Total 2017 Travel Network revenue growth is expected to be between 5% and 7%.

In Solutions, 2017 was always anticipated to be a slower growth year. We expect continued growth in Hospitality Solutions, while Airline Solutions growth will be incrementally slower than we had previously anticipated. Taken together, Airline and Hospitality Solutions revenue growth is expected to be between 5% and 7% in 2017.

We expect strong growth in Hospitality Solutions to continue with our continued leadership and success with small to mid-size independent chains, providing a source of consistent revenue growth. The momentum of migrations at Wyndham and growing relationship with Carlson and some very promising discussions with other major enterprise brands that we expect to provide additional growth opportunities for the business.

Looking at Airline Solutions, after a very strong year of revenue growth in 2016, we expect 2017 revenue growth would be more modest, with several puts and takes across the year. On the plus side, we expect momentum in the AirCentre and AirVision product portfolios to continue. We expect SabreSonic revenues to be roughly flat, resulting from continued but slower benefits from same-carrier growth within our installed base and the fourth-quarter 2016 implementation of Alitalia, offset by the expected mid-year roll off of Southwest Airlines.

A portion of the growth we had previously anticipated for 2017 is now expected to come more so in 2018. For airline-specific reasons, the SabreSonic implementation pipeline has pushed out to late 2017 and 2018. So we need to adjust our forecast accordingly.

As we've previously discussed, given the ongoing restructuring of the airline, the Air Berlin SabreSonic implementation has been delayed and is now scheduled towards the end of 2017. The LATAM implementation is now expected to go live in the first part of 2018. As previously discussed, Copa has re-prioritized their technology planning to accelerate certain solutions implementations, like Intelligence Exchange, while delaying the SabreSonic implementation to at least 2018.

Additionally, as a reminder, Southwest Airlines is moving off their legacy reservation platform that we have been managing for them. We expect our services to them for this solution to end in the second quarter.

The current full-year run rate of impact to passengers-boarded revenue and EBITDA is approximately $150 million PBs; $50 million and $40 million, respectively. Based on the anticipated mid-year timing of the roll off, we will feel half of the impact of this headwind in the second half of 2017 and the first half of 2018. Excluding the impact of the loss of Southwest, Airline and Hospitality Solutions revenue would have been forecasted to increase 8% to 10% in 2017 versus our forecast for a 5% to 7% growth.

At the Sabre corporate technology line, the increased investment in modernization and continued investment in stability and security of our technology platforms includes accelerating adoption of cloud and open-architecture systems will drive incremental operating expense in CapEx in 2017. We've made good progress in these areas over the last several years. But we believe we need to go faster, and expect that these investments will drive speed to market and increase customer loyalty over the coming years and result in strong return on investment.

On a net basis, the key takeaway from our 2017 expectations are the following. Solid revenue growth, driven by what we expect to be a strong year for Travel Network and Hospitality Solutions, while Airline Solutions growth moderates. A pause or slowing in our strong multi-year EPS and free cash flow growth, driven by our investment in technology and platforms that set the stage for expected better efficiencies and growth going forward.

Rick will now take you through the specifics of our 2017 guidance before we open the call to your questions.

Rick?

For 2017, we expect total revenue growth of 5% to 7%, or $3.54 billion to $3.62 billion. Profitability and free cash flow will be impacted by higher operating and capital spending for hardware, software and labor associated with our technology platform modernization and increased long-term efficiency, stability and security. Reflecting this, adjusted EBITDA for the year is expected to be between $1.08 billion and $1.12 billion, with full-year EPS expected to be between $1.31 and $1.45.

Although we don't typically provide quarterly guidance, I think the cadence of this year warrants a bit of additional commentary. Seasonally in Q1, we expect modest low- to mid-single-digit revenue growth. A mid-single-digit decline in adjusted EBITDA. EPS of between $0.32 and $0.36, with stronger growth expected across all of these metrics over the balance of the year.

Turning back to the full-year, in Travel Network global GDP and airline capacity growth expectations are supportive of solid industry growth. With a number of new conversions in the pipeline and momentum of the business, we expect a strong year of Travel Network revenue growth. For the full year, we expect revenue growth between 5% and 7%. Q1 is a more difficult year-on-year comparison, as mentioned. We expect the year to start out relatively slow, with Travel Network revenue growth in the quarter expected to be in the low single digits and EBITDA flat to down modestly.

We expect revenue and profit growth to increase in the back half of the year, driven primarily by agency conversions that build on our strong installed global customer base. We expect a bit higher growth in agency incentives and increased technology demands, driven by the rapid growth in shopping activity to result in full-year Travel Network EBITDA margins of 39% to 39.5% for the year.

We expect Solutions revenue growth to be driven by a mix of continued strong growth in Hospitality Solutions and more modest growth in Airline Solutions for the reasons we've discussed. All in, based on Hospitality Solutions momentum and current expected Airline Solutions implementation schedules, we expect full-year Solutions revenue growth of between 5% and 7%. As Sean mentioned, the puts and takes in Solutions, we continue to expect overall good EBITDA growth and margin expansion of 200 to 300 basis points in 2017.

We forecast solutions EBITDA growth to be in the mid single-digits in Q1, with stronger growth over the balance of the year. The incremental spending associated with our technology investments will be felt in both our corporate-level product and technology operating expenses, which we expect to be about $5 million per quarter higher in 2017 versus 2016, as well as in capital expenditures at the corporate product and technology level.

Depreciation and amortization will increase about $45 million year over year. We expect a full-year P&L tax rate of between 32% and 33%. GAAP CapEx is forecast to be $360 million to $380 million versus full year 2016 capital expending of $328 million. Capitalized implementation costs are expected to be between $85 million and $95 million for 2017, compared to the $83 million in 2016.

Looking at free cash flow, we expect mid-single-digit EBITDA growth, combined with increased capital expenditure and a restructuring cost, to result in free cash flow of approximately $350 million for the year. We are targeting leverage of around 3 times, giving us good flexibility to take advantage of M&A opportunities and providing the ability to begin to repurchase shares on a regular basis. As part of our long-term capital allocation strategy, today we announced a $500 million multi year share repurchase plan.

We expect our repurchases to roughly offset dilution from the employee equity plans. Spending under the plan is expected to be approximately $150 million per year, subject to the vagaries of timing and share price.

So with our 2017 expectations set, what are the implications over the medium-term?

We expect consistent, strong performance at Travel Network and Hospitality Solutions. While still a work in progress, the slower growth in Airline Solutions and the incremental technology investments we are making require us to revisit our multi year view. That said, our current view is that EPS and free cash flow for 2018 will be lower than implied by our previous multi year outlook, and will reflect similar business fundamentals and dynamics as 2017. In Travel Network, we expect to continue to gain share as we focus intently on differentiating the platform to deliver increased value to the agencies and travel suppliers in our global network.

I think you can feel our enthusiasm and confidence in Hospitality Solutions. The opportunity is large, with an industry that has historically relied on too much insourced and fragmented technology. It is now ready to increasingly adopt best-of-breed true SaaS solutions.

In Airline Solutions, with the SabreSonic implementation at American Airlines now anniversaried, we expect our consistent carrier growth to slow somewhat. Additionally, much of the incremental SabreSonic growth that we had previously anticipated to occur in 2017 from the new implementations is now expected to benefit 2018 and beyond.

We are increasing our focus on driving attachment and share of wallet across our airline customers. We expect continued solid growth from AirCentre and AirVision over the years to come. We expect our elevated level of technology spending in support of our initiatives to dampen the profit and free cash flow growth initially, while providing a foundation for greater efficiency and stronger growth down the road.

With that, back to Sean for some final remarks before opening up the call for your questions.

Thanks, Rick.

To be clear, the business is on solid footing heading into 2017. While we understand some aspects of our outlook are below expectations, we believe the incremental investment we are making in our technology platforms will serve to strengthen our business and set the stage for strong, long-term top and bottom line growth.

Our team here at Sabre is the best in the business. By their very nature, they are winners. They like to be winners in the market with innovation and winners in the market with financial results. We view this reset of outlook and expectations as an opportunity to accelerate investment and tune up the Sabre machine for the future.

From a personal perspective, I might be the utmost energized and excited about our future. Yes, there is hard work ahead. But the opportunities for us to continue to innovate and grow are endless. Our focus needs to be relentless, with rigor and urgency to get products to market to achieve what I believe are justifiable returns. In the coming months, I look forward to sharing our story and progress made.

Before we open the call for questions, I want to once again thank you for joining us today. With that, I'll ask the operator to open up the call for your questions. Thank you.

(Operator Instructions)

James Schneider, Goldman Sachs.

Good morning. Thanks for taking my question and welcome, Sean. I wanted to maybe ask first of all about when you look at the increased investments that are necessary, can you name the top two or three priorities?

Is that infrastructure to maintain the stability of the overall platform? How much of that is SaaS-based solutions and other next generation things?

How much is investing for the future versus fixing what is broken? And maybe if you can roughly bucketize that in terms of the overall total spending amounts you are putting to that?

Yes. I'll kick this off and then if Rick has a couple comments, I will let him go from there. But let me give you a couple examples because I think it is really important that you understand as we're looking at this, and we've gone through essentially building the plan for 2017, what did we see?

And one of the areas of investments that I did highlight, as it related to Hospitality Solutions and really increasing the investment in the Property Management System. Since taking over the new role, I have been able to sit with some of the big enterprise companies that are out there and it is very clear that what we are doing within Hospitality Solutions is hitting the mark. So we have elected to go ahead and increase the investment there and actually get those capabilities to market sooner. Another one that I want to talk about is really on the shopping side of the equation.

There has been a lot of questions out there, relative stability for different airlines and I think it is important to really hit this head on relative to what we are doing because it is important to us relative to being stable. We have been looked upon as a rock solid operator and the ability to make sure that we can have our customers perform. In one area that took place in October, is we had an issue with one of our pricing systems.

And in doing that, we went through the evaluation of investment and what we needed to do. But more importantly, one of the things that we, as we look into the future, we decided that we needed to begin to move away -- some of the shopping capabilities out of our Tulsa facility and move it into our own facility. And in doing that, that is an added investment but let me walk you through the importance of that. If you look at the marketplace and what's taking place, shopping is really ballooning.

We continue to see it relative to OTAs and the look-to-book ratio is increasing around the world, specifically in EMEA and in APAC. And as we look at our ability to essentially move ahead of the marketplace, making sure that we are preparing ourselves for the future, we thought this would be an appropriate investment in doing that. Here is where it comes to bottom-line results.

When we are essentially being compared versus our competitors, people are looking at essentially not only the stability side, but they are looking at accuracy and they are looking at book-ability. And the action that we are taking here will allow us to really compete better. And actually from an OTA perspective, and the way that they move bookings around, we believe this continues to move us ahead of our competition. That should be increasing bookings going forward.

So those are two examples. Rick, I don't know if you have anything you'd like to add.

I'll just put some numbers on it. (Multiple speakers) The increased investment in hospitality solutions, as Sean mentioned, is about $10 million of CapEx. And again, that is right according to what our plan -- we said if we can invest along our road map to deliver and build off our limited service property management, we were going to do that. We have all the proof points there to do that, so we are going ahead with that and really pushing into it.

Of course, as we continue to invest at the normal levels on our central reservations and our digital marketing services. And then secondly, this migration of the shopping complex and related command centers. We are moving to our own managed data centers out of the Tulsa facility which is an [HPE] managed system right now. That's about $20 million in capital expenditure in 2017.

Thanks for that. And then maybe just a follow up on your longer-term outlook on the financial side.

Correct me if I am wrong, Rick, but I think you mentioned free cash flow growth and EPS growth in 2018 similar to 2017 which would -- is that implying that EPS, we are looking at mid single-digit growth? And potentially no free cash flow growth in 2018? When would we expect that either the CapEx investment or the OpEx investment starts to letup so you get that fall-through again?

Yes, Jim, it's the dynamics for 2018 are very similar to what we talked about in 2017. So as Sean pointed out, and I, we have to re-look at our mid-term outlook. And so the pace of the growth in EPS and free cash flow that we'd expected previously in our medium-term guidance is off the table and we are going to have a more muted development there.

We are growing. Remember, we are having strong revenue growth across the business and we called out these additional investments in both capital expenditure and some related operating costs, primarily around the buckets of stability, speed and infrastructure, as well as then -- as we invest more in Hospitality, in Travel Network, we don't get the benefit of some of the full-year big agency conversions until 2018.

We'll just start to get that. So that's -- those dynamics that we are seeing in 2017 continue through in 2018 so we are going to expect some additional spend on these items in 2018 like we had in 2017.

Thank you.

But again obviously, we look to meet or do better in terms of our guidance on the levels of capital expenditure in 2017 with the priority and the focus that Sean mentioned. And we will see then how that sets us up to step off into 2018 when we are closer to it.

Thank you.

Next question?

David Togut, Evercore ISI.

Thank you. Good morning and congratulations on your promotion, Sean.

Thank you.

You mentioned your goal of accelerating the growth of agency incentives and I would appreciate your addressing how you think about the use of agency incentives long-term, in the sense of -- you seem to be getting more aggressive on pricing as part of your strategy to gain share along with the additional investment you are making in technology, but perhaps you could just address your thoughts about pricing, how important it is to driving your growth going forward.

Hey, Dave. This is Rick. Let me first -- we aren't -- we don't have a goal to increase our incentives but rather we pointed out in 2017 it would be increasing a bit more than where they were in 2016, where we actually had stronger revenue and bookings price growth than incentives. And this year there is a bit to the other issue or the other side. Sean mentioned, and again what we are looking to do -- we have shown we are a sustainable gainer of market share globally, and that is profitable market share.

And we are looking to, as we always have, make sure that we play strategically and tactically for that longer-term to increase our global delivery for the customers, that's on the agency side and on the supplier side. In 2017, we had the dynamics that we expected and that results in, rather than being a little bit above 40% EBITDA margin, we expect to be closer to the 39% or 39.5%. That stayed within our range, you've heard me talk about 40%, plus or minus 50 basis points. That is what Sean was referring to.

And then, to market dynamics, Sean, I think you can open that up better for David.

Yes. And thanks for that clarity, Rick. I think the important thing is, as everybody knows, 2016 was a big year for us relative to some major negotiations that took place. And in doing that, it again solidified the relationships that we have with some of the largest TMCs as well as the online travel agents that are out there. As we continue to move forward, those relationships will continue to grow stronger.

And in that, the economics that Rick has outlined previously, is the foundation by which we have our book of business and it is out there for a period of time. As we look at the future, I think the one thing I want to clearly point out is this long-term new Sabre Red Workspace is really beginning to change the dynamics relative to what we are able to do with capabilities. And that is really allowing agencies to absorb the content of what both our hospitality customers and airline customers are trying to push.

And as we do that, it is the balance of how do you make sure that product is really leading? It is not the incentives that are leading and we will continue to have discussions. It is a competitive marketplace but I can tell you we are leaning in heavily with our products and our capabilities because at the end of the day when people are going to look and they are going to compare our products and capabilities versus our competition. We believe that financial results for ourselves as well as our customers, both on the supplier side as well as the buyer agency side, will be better off with our tools.

Understood. And then, Rick, historically you've talked about a medium-term [PB] pipeline for airline solutions of [650] million PBs. Where does that stand today?

Obviously, the pipeline for our implementations have pushed, as we had talked about. We talked about that through the year in 2016 as we got visibility with that. We called out the impact from Copa when they made that decision.

We called out the impact related to the Air Berlin structuring when that was made public and we had agreed with the customer how that would impact. We said LATAM is going to be in the back half of 2017. We've updated that to the first part of 2018 and that is a decision in concentration with the priorities of the airline. So with those, we clearly shifted the pipeline to the right in time.

I think the episodic nature of these things is -- it is hard to predict when the next 100 million PBs are going to come on and be won, and then implement it with the next 200 million PBs, the next 500 million PBs. They haven't gone anywhere in the market place. But as we talked about, I think the decision-making from the airlines and some of that is specific airlines that are going through a little bit of restructuring here, make it pretty hard to predict entirely that number, David. What we have seen is the complexity in some of the legacy in the industry continues to be there on systems that are run by parties that have not shown that they have invested in scale, like us, or their own systems. So we feel good about the opportunities stretched out and a little bit more episodic.

Yes. And I'm going to add to that. And if you will indulge me just for a moment, I'm actually going to marry some of my experience on the airline side of the equation and what we are facing here. Sitting on that side of the equation, I actually was a part of two PSS conversions and one of them I was the executive sponsor that actually did the conversion.

I was also part of an organization executive management team that many of you know I worked for Air Canada and we were looking at developing a new PSS system called Polaris. The important thing in all of this is, and I know everybody knows this, it is the critical decisions that are made because it is really a heart transplant that is happening. And you have to understand really your business is and where it is going and are you willing to make that change going forward?

Where we sit now, and this is where I look at -- we talked about our investments and where we're going to focus more on investments. This is an area for me that we need to put more effort into. We are already doing a lot but I think the opportunities are there because the world is not getting less complex, it is getting more complex.

And as we listen to our customers, specifically our airline customers, they want more. And in doing that, it is hard for them to do all this stuff. It is expensive, it is difficult and it is multi-year with what needs to take place.

So why Sabre? I think we are strongly, well-positioned relative to our knowledge in the marketplace and understanding what needs to happen.

This is not only from -- only looking at the PSS-side of the equation but I also look at it from the distribution side of the equation. So you begin to marry what happens on the PSS to what is happening on the GDS. All that is core to PNR, shopping, ticketing, and our ability to continue to evolve that space is going to make it better for our customers. And in doing that, they are going to look at the trade-off relative to they continue to have an in-house solution, do they look at the competition or do they look at where we want to take, essentially, the space moving forward.

So when I look at this, I get pretty excited about it because I understand sitting in that chair what essentially airline executives want. We need to make sure that we are investing and investing faster to get, really, product and capabilities to market to enable what they are wanting to do.

This question is in-depth, allowing us to open it up to make the connections a little bit.

Thank you.

Ashish Sabadra, Deutsche Bank.

Hello. I had a follow-up question on the Solutions as well. The 8% to 10% growth, excluding the Southwest, is still below what we have seen historically. My question was how should we think about the growth profile in this business?

Hospitality is doing well but is the Airline Solution now in much more delayed innings? Is there more opportunity there? Or is -- are we going to see growth slow down going forward?

And then follow up to that would be, what are the implications on margins if the growth slows down can you deliver margin expansion in that business?

Hey, Ashish, thanks. This is Rick. First, margins, as we said for 2017, we see a 200 to 300 basis point expansion of margin so we still do have scale there even at a somewhat slower growth. That is important to call out and realize.

Excluding Southwest, the 8% to 10% revenue growth versus the 5% to 7%, we wanted to make sure we sized that up. That still pretty significant growth on revenue for something that is over $1 billion, albeit, as you said -- say you point out, it is a little bit slower. Let me translate to passengers boarded to give you a little bit better view there.

Excluding Southwest, we would have -- expect passengers boarded based of our 2017 guidance to increase 5.5% to 7.5%. Industry-wide that is expected to be 5% so we are above industry, excluding Southwest.

Our rate of outpacing the yearly industry growth has slowed a bit because we have brought the world's largest airline on, American Airlines, who is not growing at the world 5% average. That's how the math works out.

Thanks for the color and then a question on free cash flow. Does the free cash flow also include the $40 million of litigation expenses? And you called out the puts and takes from an investment perspective.

Are there any other things that we need to take into consideration? Is there a way to think about a more normalized free cash flow, excluding these investments, on a more normalized basis?

Yes. The free cash flow -- let me give the bridges there. Obviously we start 2017 with a lower base EBITDA, a little bit of it coming out of 2016. We have Airline Solutions implementations that are pushed out, that causes some flow-through of lower EBITDA.

And we called out the areas where we're focused investment on CapEx and a bit of the OpEx in supporting these technology initiatives as well as acceleration in the Hospitality. The charges that we took in Q4, the $20 million severance-related charge is a cash item that will impact us in 2017. The litigation charge is not a cash impact, and known at this time, it's an accrual based on a matter that is not finalized.

It is being appealed and so, no. It is not part of that [log]. The severance charge of $20 million is.

Thanks for the color.

Thanks, Ashish.

Abhey Lamba, Mizuho Securities Company.

Yes, thank you. Just continuing on the Solutions. You mentioned that the pipeline of opportunity is still there.

What can you do to unlock that opportunity and [incent your lines to move] or are you at the mercy of airline's calendar, which would imply that we have limited visibility into when we can see the gross accelerated growth?

Yes, I'm going to go back to my previous statements and that is, when you look at it relative to how airlines are looking at the opportunity, it gets into what do we have out there from products and capabilities? And again refers to why I believe we have to increase our investment in this space because they are going to look at the balance relative to the system that they have in place today, be it in-house or be with a competitor of ours, and in doing that, continue to work through it.

And when you look at it as well, these are long sales cycles and what takes place, and many times they'll get to a certain point and potentially slow it down. But so for us it is important to be in front of, essentially, the airlines, walking them through where our products and capabilities are going and making sure that they actually meet the mark and what needs to take place. The other important thing that, as we continue to look at the future, and this really gets into how products and services are being sold, and this is not only just for full-service carriers but it's for low-cost carriers as well, is the need for ancillaries, branded fares.

How do we make sure that our products continue to evolve that allow all selling to take place. And our ability to actually move faster into those opportunities becomes more and more important because it is the only be selling side of the equation but it is also the delivery side of the equation. So you as the customer, when you buy a product you are looking for that to be delivered at the end of the day. This gets into, again, how I begin to look at distribution and actually the operating systems to be able to sell and service products that customers want at the end of the day. And it's continued dialogue and we will continue to do that in the months and years ahead.

Got it. Can you quickly discuss the long-term impact of USAir judgment in terms of how you do your business? How you price your products?

Any discussion of that? That is it for me. Thank you.

When we look at it, right? This was, as everybody is aware, this was a very complicated case that took place. We continue to believe we operated fairly and accurately. As we look at the future, and this is sort of where I am, it's -- we are positioned in the marketplace to be a real fare provider of content and capabilities and selling to customers at the end of the day.

And in doing that, we will continue to work through the case because right now it is in a number of processes relative to what is going on. We are engaged with American right now in discussions on where do we continue to move our partnership, because it is a partnership. I can tell you as it relates to other airlines, we continue to have the same discussions that we've always had and that is how do we continue to evolve, what they are wanting in the marketplace and how do we make sure that we are delivering that at the end of the day.

So, have there been questions out there? Absolutely. But we are very focused on delivering the capabilities that we think are going to continue to bend the curve as it relates to distribution.

Thank you.

Brian Essex, Morgan Stanley.

Hi. Good morning and thank you for taking the question. I guess this one is for Sean. If we think about the investments that you are making in technology going forward, and essentially how you are compensated currently.

How do you think about payback on those investments from an economics or revenue model perspective. How do you anticipate that might impact how you're paid for the sale of ancillaries and over how you are or are not paid for better distribution, right now?

Brian, that is a really good question. And since I have been at the organization now for a year and a half this is part of when I made my comment, during our prepared remarks, I talked about all parties needing to be involved in talking about this. And my focus is -- when we look at it from what we are doing at Sabre, is how are we making sure that we put the technology capabilities in place. And what you will hear, and this is looking at both sides of the equation, is you have suppliers -- airline -- our airline customers are wanting to sell these products and services and they want to sell it through the GDS.

That is why we have invested heavily in Sabre Red Workspace. And when you look at the capabilities, it is there. More importantly, I will touch upon, because this gets back to investment and what we are doing -- Sabre Red Workspace, as I mentioned in my remarks, is using those APIs to be able to pull in that content. That content can be pulled in by other OTAs, other corporate booking tools. It can be pulled in by mobile.

We are looking at how do you use those capabilities to scale. But back to your question, the important thing is, is what is the incentive structure on the other side of the equation as it relates to agencies? Because you have -- and the business models are a little different.

Let me give you an example. OTAs are very focused on getting the transaction done, right?

I go back to that speed comment that I had made earlier. And they are not really wanting individuals to pick branded fares, and I'll use branded fares as the example here. Once the essential transaction is -- or the ability to lock into a price, they'll look at cross-selling and up selling at that point and then selling the ancillary.

So they are looking at, how do we get the hooks into, essentially, that customer because they don't want to lose that individual and then how do I cross sell and upsell? It is a little different for brick-and-mortar agencies. They will look at how I am I making sure I am putting the best forward product to my customer the end of the day.

So it is selling a branded fare, for example, on the front end of that. Now what we hear from the agency community is, if I'm going to go through that extra effort, how am I going to be compensated for? And, Brian, that is where we are in the conversation as it relates to both sides of that equation and we will continue to work through it.

But I do see -- and this goes back to what we've talked about relative to the billions of dollars that are being sold in ancillary and branded fares through airline direct -- and what could be untapped when you go to the indirect channel. So when I talk about indirect and direct, I am looking at it in distribution in general. And this is just an evolving conversation that will continue to take place but it comes back to our technology and capability to enable it.

Got it. So right now most of it, it sounds like most of those ancillaries are being sold to the direct channel and you are trying to make an effort to pull that through your indirect channel?

That's correct, Brian.

Got it. And if I could just follow up on the PB pipeline. A follow-up to David's question. We have some visibility of what is coming up for renewal, but in terms of what is pushing out, what are the primary reasons that deals are pushing out? Is this on more the airline side or is it incremental issues in terms of difficulty and complexity with regard to implementing the deals?

No. Typically a push out is done based on -- it is essentially those that are out trying to determine where they are going to go moving forward. Brian, it is one that they are pushing out for certain reasons. When we have specific customers, and I'll use LATAM for an example, it's one that both parties decided that there was some more development that needed to take place and that pushed a little bit to the right. But when you look at it relative to the pipeline, it is really driven by the airlines themselves and getting to the comfort level of when and why they were cut over.

Got it. That's helpful.

Thanks, Brian.

We will now hear from Jason Kupferberg with Jefferies.

Good morning. This is Ryan Cary on for Jason. Just one more on the free cash.

Up until recently I know the conversation had been around the free cash flow in the $500 million range. Clearly you've discussed the need for incremental technology investment in 2017 and the additional restructuring charge, but I'm just trying to get a better sense of how this changed so dramatically just over the past couple months.

Ryan, as I talked a little bit about, there is four drivers there and the impact of the cash from the restructuring charge is $20 million. That is in 2017, and we made that decision at the end of the year to better focus on things that are going to deliver speed, better investment in the right people in the right places there. So that is new, obviously.

And then in terms of -- related to the efforts around the capital expenditure and the OpEx expenditures that are greater in 2017, we've talked about what those are. Those are fairly material in both CapEx and OpEx and it takes out of the cash and then the implementation push outs is the next bucket. And again, just the bit lower EBITDA.

So each of those are some tens of millions of dollars and that is where you get the bridge from what the previous expectations were. Going through 2016, it was clear that we fell a little bit short in Q3. We talked about, here in Q4 when we met across Travel Network and Hospitality, but we did come up a little bit short in the Airline Solutions related to the non-reoccurring professional service consulting fees.

Those are the -- that's the build up there.

Got it. And then moving to Travel Network. I wanted to ask a little bit about Flight Centre. I believe in the past you called out an incremental $80 million annualized benefit to revenue.

So should we expect to see some of that benefit flow through as soon as the switch is flicked on or is this much more of a gradual roll on. I'm just trying to get a sense of what the impact will be in 2017.

We talked about a $100 million revenue run rate, about $80 million of that incremental to the business that we have currently have with them. So you are spot on about that. As we've said though, we don't start getting the benefit of that really until the backend of 2017.

And it is really pretty small. And then we expect to get the full run rate benefit of that [in all in] 2018. That incremental $80 million [all else equal].

Great. Thanks for taking my questions.

John King, Bank of America.

Great. Good morning. Thanks for taking the question, which is one follow-up really. Rick, I appreciate the initial 2018 comments were just that.

They were not a guide but I'm just trying to put together some of the puts and takes around the free cash flow if you are implying that, that will be pretty steady between 2017 and 2018. I am thinking you should obviously have a little bit less restructuring. There should be a few incremental deployments in the IT Solutions business. So what is the offset?

What is the take, if you like, with some of those things sliding through? Is it -- any further one-offs or are there some kind of factoring in of some pressure on the gross margin? Thanks.

So, John, you can characterize it as pretty steady for the reasons you said, no need to repeat that. I think you got it. And again obviously, we were to have less one-offs and so that is [a balance] and we took the charges that we paid in here. We've called out the accruals regarding the litigation that is, again, not finalized. So that is the best visibility I have there.

And then essentially, what you get into is the normal working capital timing, and we have a little bit impact in 2018 on that, that dampens the little bit. As you have seen, we have -- can have fairly material swings in the quarter around our working capital about when [and with the clear types of things to get the] (technical difficulties) which was some of the dynamic in Q4 where people have a hard time, saying how are you going to generate that amount of free cash flow in Q4. Well, we did because we have a handle on our working capital items.

But we have some other things there that put a little bit of a damper on 2018 that would be additional to that. And again pretty steady, as you said. For 2017/2018 we look for upside on how we get some benefits faster from some of the investments and that would be on the other side of the coin.

Understood. And just a very quick follow-up on that. What should we be thinking about as part of the free cash flow for 2017 in terms of working capital. Will this be a flattish year or should we see some in-flow?

It is pretty flat. We don't see the dynamics we saw in 2016, so a little more stable.

Great. Thank you.

Thanks John.

Brad Erickson, Pacific Crest Securities.

Thanks for taking my questions. First, can you just comment on how you think GDS share did overall in 2016 versus 2015?

So GDS versus non-GDS booked air tickets. And then secondarily, some larger airline execs have been out recently talking about distribution, wanting to potentially pay less in the future. Can you address that and what you are hearing regarding airline's appetite for distribution going forward? Thanks.

Yes, the channel shift. There was actually a little shift into the GDS. In 2016, we had talked about that expectation coming and the year it played out that way. And in 2017, we see a little shift out of it, all else equal.

And I will address your second part of your question, Brad. And that is just what has been stated in the marketplace and, listen, this has been going on for years. And where I keep coming back to and it is really the focus relative to products and capability is the ability to help our customers sell their products and services really changes the tone of the conversation of what needs to be done.

And in doing that, this is again why I am so focused on where -- areas of continuing to push investment in capabilities because it doesn't meet the target of what our customers want. And in doing that, we are looking for that flexibility.

Now, you add the complexity what people are wanting to do from personalization and other things that are out there, but our ability to just meet, relative to what are the basics of what we continue to move the model forward, are a big step. And we will continue to have the dialogue as we have, but for me this continues to be a primary focus. It is a cornerstone on our ability to be successful in the future.

Thanks, Brad.

Jed Kelly, Oppenheimer.

Great. Thanks for taking my question. What macro and industry factors are you closely monitoring that you believe could cause your financial performance to deviate from your 2017 guidance.

Obviously the global macro is the biggest one, right? As you said, we are seeing a fairly supportive view of that coming into the year. We saw that coming out of Q4 and that is really what drives bookings.

So when I say global macro, it is really -- that is the thing that drives bookings in the industry and primarily air bookings and then other related bookings. That is always our biggest fluctuation and possible upside or downside. We are seeing -- we're hearing from the major airlines, particularly in North America and elsewhere around the world, that coming out of Q4, which was a strong one for us and we took advantage of that, that, that is [going] to continue through January.

I'll add as comment to that is we look at bookings. And granted, we only have one month under our belt right now, but the trends that Rick has talked about coming out of the fourth quarter, when you look at each of the global regions that we participate in, we are actually seeing growth in all those regions.

The other thing that I would point out is, we did see lackluster business traffic last year, sort of ups and downs, and that has actually ticked up pretty well at the beginning of the year. So as we look at, it based on what we see right now, we are comfortable but we continue to monitor because situations can change.

The three years of lackluster business were driven by the oil and gas complex around the -- North America and the world. The financial sector which pulled back significantly and a bit around government. I think all three of those look more stable as we come into -- here in 2017, compared to where they did at the back half of 2015 and going into 2016.

Thank you.

And we have time for one more question. Matt Pfau, William Blair.

Thanks for taking my question. Just one for me and you touched on this just a little bit.

Wondering if when you look at the Travel Network guidance, if you can parse out your expectations in terms of the different levers of growth there? So the difference between perhaps over all travel growth versus share gains and then pricing.

In Travel Network, we've got revenue expectation growth of 5% to 7%, as I mentioned that is on bookings growth of just a little bit below that. So that applies a little bit of price gain and in the context of -- we are having incentives up a little bit, but that is how it all nets out. So very supportive.

Great. Thanks guys.

Thank you.

With that, I would like to turn the call back to Mr. Menke for closing remarks.

First, I want to thank everybody for joining us this morning and [letting] us providing the update for you to have a better understanding of really what is taking place at Sabre. The one thing that I hope you are really walking away is, as we go into 2017, we are in solid footing. As we walked through Travel Network and Hospitality, we are really excited about what is taking place there.

As we look at the Airline Solutions group, as I mentioned in my comments, we are focused on how to be continue to look at opportunities to maximize the return on the products and capabilities that we have out there. And we continue to look at ways to drive more efficiency in product and technology. As I look across the entire organization, it is not that we have a lack of opportunities because there are numerous opportunities.

It really gets into, how do we make sure that we are prioritizing those opportunities and executing to get products and capabilities to market because that is what we are looking for and I know that is what you are looking for, is how is that driving better financial returns into the future. And with that, again I want to thank everybody for joining us today.

That concludes today's conference. Thank you for your participation. You may now disconnect.