Sabre Corp (SABR) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Sabre Second Quarter 2017 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 expressed 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. Please go ahead, sir.

Thank you, Carolyn, and good morning, everyone. Thanks for joining us for our second quarter earnings call. This morning, we issued an earnings 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 IR web page. 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 certain 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 for non-GAAP measures are available in the earnings release and other documents posted on our website at investors.sabre.com.

We would like to advise you that our comments contain forward-looking statements. These statements include, among others, disclosure of our guidance, including revenue, EBITDA, net income, EPS, cash flow and CapEx, our expected segment results, the effects of new or renewed agreements, products and implementations, our expectations of industry trends and various other forward-looking statements regarding our business. These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's call. Information concerning the risks and uncertainties that could affect our financial results is contained in our SEC filings, including our 2016 Form 10-K and our first quarter 2017 Form 10-Q.

Participating with me on today's call 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 a review of our strategic and commercial performance and outlook. Rick will offer additional perspective on our financial results and the forward outlook. We will then open the call to your questions.

With that, I'll turn the call over to Sean.

Thanks, Barry, and good morning, everyone. Before I get into my prepared remarks, I do want to just walk through a few things that as we've managed really, since I've jumped into the seat 7 months ago, the one group I really do want to thank is the employees of the organization. They have worked tirelessly through a number of the things that we have been focused on really getting accomplished. And in doing that, we've had to make a number of tough decisions, one being yesterday relative to some of the employees leaving the organization. And I owe a debt of gratitude to not only those employees, but all the employees that are getting a number of things done.

With that, in reporting the second quarter, we've met expectations relative to what we've put out there, and we've reaffirmed early guidance for the balance of the year. And it's important to understand that there's a lot of really good discussion taking place within our organization right now relative to where we are, where we're going, the opportunities that really sit out there. And as I sit here halfway through the year, I will share with you that I feel like there's a lot of positive momentum relative to what we have been doing and really, the steps that we were taking to really move into the opportunity that sits out there. And we have spent a lot of time really meeting with airlines, meeting with hoteliers, meeting within agencies and understanding really how they're looking at the future and looking at their challenges and how do we actually help their challenges. And in doing that, it's really allowed us to refocus a lot of the good things that we're doing, making sure that we're focusing on things internally that are going to allow us to deliver the capabilities really to enable them to be successful going forward. And with that, as we go through really prepared remarks and get into the Q&A, it's really the backdrop of really how we dug into understanding what's happening within the business units, understanding SHS and Travel Network and Airline Solutions, really doing a deep dive that we've done in technology, understanding really where we're doing well and where we need to step up a little bit. We've identified leadership needs and we talked about those, and we've identified things that we're taking place out there and really organizational alignment.

So with that, sitting halfway through the year, I'm really just proud of the organization and the things that we've been able to get accomplished. With that, like I said, there has been some tough decisions. But as we continue to forge forward, I think there's just a bright opportunity for this organization.

So with that, let me go ahead and move into really the results for the quarter and give you a little more color on the initiatives taking place. So for the second quarter, overall revenue growth was strong at 7%, in line with our expectations. We continue to make good progress across a number of key initiatives, including strengthening the senior leadership team, insourcing our shopping complex, establishing our global network operations center, accelerating the development of our next-generation hospitality property management system and thoroughly reviewing our Airline Solutions portfolio. And as you see from our press release today, we announced a program to reduce costs and drive greater alignment across the organization.

Our solid quarterly results absorbed approximately $15 million of impact from items that were called out but not incorporated into our forward outlook on our last earnings report due to the timing of the events.

Items impacting profitability in the quarter included stranded costs related to the previously announced mid-quarter halting of work on the reservation system implementation at Air Berlin that drove a decrease in capitalized labor and corresponding increase in operating expense in the quarter; a reduction in revenue and profitability related to the shift in revenue recognition from Alitalia due to its insolvency proceedings; and incremental security and stability expense and associated service-level agreement costs, including those related to our hospitality cybersecurity incident.

For Sabre overall, this resulted in total Q2 revenue increase at 7%, driven by 6% growth in Travel Network as we grow faster in higher-value markets like EMEA, and 8% growth in Airline and Hospitality Solutions, supported by 8% PB growth, which included 5% organic growth and continued strong hospitality transaction volume growth. Adjusted EBITDA declined 4% year-over-year. Adjusted operating income was down 11% from a year ago, and adjusted EPS of $0.35 was down 5% from a year ago.

This year, we're taking specific and tactical actions to address both our challenges and opportunities. We've narrowed and reinvigorated our executive leadership team, accelerated the continued evolution of our technology infrastructure, refocused the business on the areas of greatest opportunity and begun the process of better aligning our organizational structure and cost base to these opportunities. This means we are playing to our strengths by increasing focus on areas of greatest ROI and market opportunity, pulling back from areas that don't justify additional investment and better aligning our cost structure with customer needs and market demands.

Through our business and long-term strategy review, we have reaffirmed our road map and invested in both Travel Network and Hospitality Solutions. In Airline Solutions, we are highly confident in our SabreSonic PSS and the opportunity and importance it has today and into the future. We have thoroughly reviewed our AirVision and AirCentre product portfolios and begun making adjustments to help ensure alignment with our customers' top priorities and the appropriate investment returns for Sabre. This means shifting focus and resources towards SabreSonic and other core products.

Yesterday, we initiated actions that reorganized certain functions and reduced layers of management to enable a more nimble, faster-moving and focused organization. For example, in our product and technology group, we have reduced the management layers in a step to improve our product owner's ability to coordinate with greater speed and efficiency across the company.

In Travel Network, we are streamlining operations centers to reduce duplicative overhead functions and cost. In Hospitality Solutions, we are accelerating the elimination of similar delivery capabilities that have been built up as a result of our acquisition in recent years.

In Airline Solutions, we are making changes to the way we are structured in sales, delivery and customer care to drive efficiency, accountability and customer responsiveness.

Last, we have reduced our corporate staff headcount by 12%, eliminating certain activities and focusing more directly on functions that support our near and midterm operational and strategic initiatives. A derivative of this work is a need for fewer but more focused resources. The cost reduction and business alignment program results in a $25 million charge in the quarter, with expected in-year savings of approximately the same amount. Estimated savings under the program are expected to total approximately $110 million per annum at a full run rate. The actions we announced today will reduce our global headcount by approximately 9% and reduce our total cost across cost of revenue by approximately $60 million and SG&A by approximately $15 million from today's levels. We are grateful to those employees that are leaving the business and the contributions they have made.

The culmination of these actions are instrumental in helping us meet the financial targets we have laid out for 2017 and to align our cost structure to a slower growth in Airline Solutions in 2018. Additionally, these actions and our view on the global business environment allow us to target 2018 free cash flow growth in line with revenue growth.

We have sustained momentum on the strategic initiatives we laid out earlier this year, including enhancing our leadership team with a strong mix of leaders with deep industry expertise and external experience. Wade Jones was promoted to President of Travel Network. During my tenure as President of Travel Network, I worked closely with Wade and know the kind of results he can drive, and I'm excited to have him leading this business. Dave Shirk joined us in June to lead Airline Solutions. Dave is a technology industry veteran with a strong track record of portfolio management, product development and software service innovation. He's already making an impact with Airline Solutions and across the broader business as we reevaluate how we architect, sell and deliver to drive value for our customers and Sabre, and as we discussed, our Airline Solutions portfolio, the key area of focus. Our review has led to a clear direction of where we want to focus our efforts going forward with investment, sales and management focus on those areas of greatest opportunity for profitable growth with strong ROI. We'll have more to say about these efforts in the quarters to come.

Also joining the company this month is Joe DiFonzo, who joins Sabre in the new role of CIO. Joe has responsibility for our enterprise technology organization as well as corporate information technology and cyber risk and security functions. Joe brings an enormous amount of experience in data management and intimately understands the spectrum of options to effectively and efficiently manage the growing demand. He has significant experience in successfully operating and supporting the modernization of high-volume, high-reliability and low-latency environments. He will draw on this experience to continue to build out the next-generation tools and processes to enhance our technology infrastructure. And just this past week, I was very pleased to announce that Clinton Anderson will assume the position of President of Hospitality Solutions. Clinton is a proven leader, both within Sabre and throughout his career. He has played a key role in developing our strategy, including our Hospitality Solutions strategy, and I expect him to make an immediate positive impact on the business.

In addition to strengthening our leadership team, we are also making good progress on implementing our 2017 technology investment priorities. The migration and associated re-architecting of our shopping complex is progressing as planned. This work is expected to further enhance systems and network stability and capability while also giving us the ability to sustain and extend our leadership in areas of speed, bookability and search efficacy while better managing shopping cost. The structure includes a virtual private cloud that provides dedicated on-demand processing capacity on a by-the-drink basis. This arrangement and our vendors' agreement results in somewhat higher in-year operating expense, offset by lower capital spending. Shopping activity will begin migrating in the second half of this year, as expected.

Another key initiative this year is the acceleration of the development of our next-generation cloud-based limited service SynXis property management system that is tightly integrated with our leading central reservation solution on the SynXis Enterprise Platform. Our Hospitality Solutions are highly differentiated, and we believe we are well-positioned for continued growth in the years ahead. Development is going well, and we expect to be in market with a solution in the fourth quarter.

The rollout of the new Sabre Red Workspace is getting underway, and we are very excited to bring this leap forward in platform and workspace service to our community of users. We have opened APIs on the Sabre Red platform to allow agencies to easily plug in, configure, or even build their own applications on top of the platform. We are working with Flight Centre as our lead customer, and feedback has been very positive.

Finally, we believe the long evolution of airline distribution is picking up steam. This evolution plays to our strengths across Travel Network and Airline Solution reservations and retailing technologies. Airlines are taking a more holistic view of their distribution strategies across direct and indirect channels that has the potential to expand the revenue pie across the ecosystem. They want to deliver increased personalization to things like dynamic offers and real-time inventory and offer management, with a view of maximizing yield across all channels of distribution. NDC, which we continue to layer into our development work, is a key enabler of this, but it's not the whole story. We believe our portfolio of technology, combined with our centrality and distribution, positions us as one of the very small number of technology providers that can deliver the end-to-end distribution solution that airlines, hoteliers and travel buyers are looking for. We are actively putting the pieces together in place to lead the industry in next-generation retailing and distribution and incorporating these delivery capabilities through our SabreSonic passenger service system. We'll have much more to say about this in the months to come.

With that, Rick will give more of the normal granularity on the second quarter results before turning to what we see ahead for the second half of the year. Rick?

Thanks, Sean. At Airline and Hospitality Solutions, Q2 revenue increased 8% to $272 million, driven by double-digit revenue growth in SabreSonic; high single-digit growth in AirVision, AirCentre; and Hospitality Solutions growth of about 10%, offset somewhat by a $4 million year-over-year decline in Airline Solutions consulting revenue. Solutions EBITDA margins were 37.4%, resulting in solutions EBITDA of $102 million, representing growth of 11%.

In Airline Solutions, sales in the back half of last year and year-to-date have been below plan, and we're working to drive improvement. That said, in the quarter, we signed multiple SabreSonic renewals, as well as new agreement with IAG for our planning and scheduling bundle. We also increased our footprint at multiple customers with solution sales at Scandinavian Airlines, Air China, Aerolineas Argentinas and Thai Airways International, among others.

Hospitality Solutions drove deeper into the market with multiple deals at customers like [Rede Nacional in De Hotels], Hotels Mission, the third-largest hotelier in Mexico, as well. We also renewed agreements and expanded our solution footprint at numerous additional hoteliers.

Passengers boarded growth benefited from the strong macro environment. Passengers boarded totaled 216 million in the quarter, an 8% increase year-over-year, and passengers boarded growth on a consistent carrier basis was a strong 5% in the quarter.

As has been broadly discussed, our services to Southwest Airlines related to the reservation systems, have now ended. This will create a headwind in the second half passengers boarded in SabreSonic revenue growth, which was already factored into our forward outlook. As a reminder, on an annual basis, Southwest reservations work was approximately 100 million -- 150 million passengers boarded, $15 million of revenue and $40 million of EBITDA.

Q2 Travel Network revenue increased 6% to $636 million, driven by bookings growth of 2.4% from the prior year. Positive pricing in the quarter was driven by favorable customer mix. Our growth is more concentrated in high-value geographies like Europe, Middle East, Africa. Segment EBITDA decreased 2% to $246 million in the quarter, due to higher technology and incentive expense. Incentive expense growth was driven mainly by the large agency renewals signed in 2016 as well as regional mix and new agency conversions, particularly in Europe, Middle East, Africa. Full year adjusted EBITDA margin expectations of 39% to 39.5% remain intact.

As expected, bookings growth slowed somewhat from the strong quarter 1 pace. Q2 total bookings increased 2.4%, consisting of air bookings growth of 2.6% and non-air bookings growth of 1%. The year-over-year calendar shift of Easter was approximately a 1 point headwind to bookings growth in the quarter. All things being equal in the macro environment, we expect bookings growth to accelerate somewhat over the back half of the year, driven by new agency conversions, including Flight Centre in Asia Pacific. We also had multiple new agency wins in the quarter that will drive additional growth and share going forward.

Regional bookings growth in the quarter was a bit more mixed story, with very strong growth in Europe, Middle East, Africa, solid results in North America and offset somewhat by declines in Asia Pacific and Latin America. Globally, our Q2 share of GDS air bookings was 36%, with air bookings growth roughly in line with our largest competitor. We continue to be a net gainer of new agencies in the quarter and to win more share of current customers that use more than 1 GDS. The Q2 share figures do not include the impact of our Flight Centre and other implementations that will take effect over the balance of the year. We remain confident in our overall bookings growth and share trajectory looking over the balance of the year and into 2018, as our pipeline of customer conversions continue to take hold.

We enjoy a strong balance sheet and leverage in our target of 3.0x or a bit below and good access to the capital markets. Total net debt at quarter end was $3.2 billion, and leverage remained consistent with Q1 at 3.1x trailing 12 months EBITDA. From second quarter operating cash flow of $155 million, we generated free cash flow of $76 million.

Strategic prioritization is leading to lower capital intensity. In Q2, GAAP CapEx totaled $79 million, and capitalized implementation costs were $14 million in the quarter. In aggregate, adjusted capital expenditures declined $19 million year-over-year.

During the quarter, we repurchased 483,000 (sic) [483,058) shares under our share repurchase authorization for approximately $10.7 million in aggregate. Inclusive of our second quarter dividend, we returned $50 million to shareholders in the quarter.

As Sean mentioned, our reported results in the quarter absorbed 3 discrete items across corporate and our solutions businesses. First, as we announced through our Form 8-K filing in late May, we've halted work on implementation of the SabreSonic reservation system at Air Berlin. We've taken a noncash impairment charge in the second quarter of $92 million. Given the substantial amount of uncertainty in reaching an agreement regarding the implementation, halting the work was the right decision.

Our decision to halt the work on the implementation did have a temporary negative impact of increasing operating expenses by mid-single-digit millions, as employees whose costs were being capitalized under the project were reassigned to other areas that largely flowed through operating expense at the corporate level. Much of this will be addressed going forward through the cost-reduction program announced today.

The other P&L impact from the Air Berlin actions in 2017 and more so in 2018 will result from the project not going live and generating an ongoing stream of passenger boarded fees. This will impact our planned 2017 revenue by approximately $5 million in the fourth quarter of this year and reduce expected revenue by about $25 million in 2018 and beyond.

Second, on the day we announced earnings last quarter, news hit that Alitalia would be entering a bankruptcy-like process. We've continued to be paid by Alitalia and expect this to be the case going forward. However, as discussed on our previous call, the formal filing by Alitalia drove a shift in our accounting from an accrual to a cash basis. While there's no impact on cash flow, this change in accounting effectively results in low single-migit (sic) [single-digit] million dollars of lost revenue from the airline in the second quarter and then for the full year.

And third, lastly, as we reported on our most recent Form 10-Q, we had a security incident in our Sabre hospitality central reservation system, where an unauthorized user gained access to the system for a time with access to certain payment card information for a limited subset of hotel reservations. There's no indication that any of our systems beyond the Sabre hospitality central reservation system, such as our Airline Solutions and Travel Network platforms, were affected or accessed by the unauthorized user. Access has been shut off, and we engaged third-party experts to assist in the investigation and remediation of the system. The cost associated with the incident and other incremental security and stability spend and related service-level agreement cost, totaled mid-single-digit millions in the quarter. And we expect mid-single-digit millions of incremental associated costs over the balance of the year.

In the quarter, we had the benefit of better-than-expected adjusted tax rate due to our mix of pretax earnings skewing towards lower tax jurisdictions.

Looking over the balance of the year, we are reiterating our guidance for revenue and free cash flow. We are lowering our EBITDA expectations based primarily on second quarter results and the expected carryover into Q3 from the Air Berlin stranded cost and elevated security and stability expenses that I just highlighted. We believe full year EPS will remain within the original guidance range, albeit likely towards the lower half of the range.

For the full year, from an EPS perspective, the reduction in EBITDA expectations is largely offset by lower D&A, interest and tax rate than previous forecast. From a free cash flow perspective, a reduction in CapEx expectations offsets the change in EBITDA forecast and the cash impact of the charge associated with our cost reduction and business alignment program.

For the balance of the year, we see a macro environment that continues to support solid growth in travel, reflected in our expectations for 5% to 7% revenue growth this year. We expect continued strong growth in Hospitality Solutions, accelerated Travel Network growth over the back half of the year and relatively flat growth in Airline Solutions. This leads to revenue expectations in line with our initial forecast of between $3.54 billion and $3.62 billion.

The recent events at Air Berlin and Alitalia, higher stability, security and technology costs and slower in-year Airline Solutions revenue production are partially offset by the 2017 P&L savings we expect to realize from the cost-reduction program. All of this resulting in an updated forecast for full year adjusted EBITDA of between $1.055 billion and $1.095 billion.

With the halting of the work at Air Berlin and other capital spending discipline related to our focused initiatives, we now expect full year capital expenditures and capitalized implementation cost to be well below our initial forecast. Capital expenditures are now forecast to be between $335 million and $355 million, and capitalized implementation costs are forecast to be approximately $60 million to $70 million. Lower than previously forecasted CapEx will drive a corresponding decrease in our 2017 depreciation and amortization expectations. Full year D&A is forecast to be approximately $365 million.

Flowing this through with full year interest expense trending towards $155 million and with the benefit of an expected full year adjusted tax rate of around 31%, we continue to see full year EPS within our original range of $1.31 to $1.45. EPS is more likely to be toward the lower half of that range given the timing of the ramp up of cost savings across the back half of the year. We continue to expect full year free cash flow to be approximately $350 million, with particularly strong production expected in the fourth quarter, similar to last year.

Looking ahead to 2018, we continue to expect business fundamentals to be similar to 2017, meaning a constructive travel market and expectations for continued strong growth in Travel Network and Hospitality Solutions, with muted growth in Airline Solutions. Additionally, savings from our announced restructuring program will align our cost structure to our solid overall revenue growth expectations in 2018, allowing us to target 2018 free cash flow growth in line with the revenue growth.

With that, I turn it back over to Sean.

Thanks, Rick. 2017 is clearly a year of transition at Sabre, with strategic initiatives and fresh infusion of new thinking among the leadership team driving significant positive change. The second quarter was emblematic of the year with consistent progress, but much more work to be done to position the company for its next leg of growth. We appreciate your interest and involvement in Sabre as we work to drive greater value for our customers and our investors.

That wraps up our formal comments. I want to once again thank you for joining our call today. And with that, operator, we'll open it up for questions.

(Operator Instructions) And we'll go first to David Togut with Evercore ISI.

Could you talk about what's left in the conversion pipeline in Airline Solutions and perhaps bracket what you mean by muted 2018 revenue growth?

David, this is Rick. And again, on Airlines Solutions revenue growth, we're comping against the Southwest, loss of that, and we lost the Air Berlin implementation. That's what I mean by it. It's simple as that. And so we've had some good renewals. The conversions that are coming, the big one is LATAM. That's the TAM part of the airline, the Brazilian. We have LAN already, the Chilean base. So that is coming in the early part, first half of 2018, on schedule. That's an incremental over 40 million passengers boarded, so that's a large implementation for the airline reservations business.

Yes, and the muted part will really be on the first half of 2018. You'll actually see some acceleration on the back, second half of 2018. Similar to what we had commented on really the first quarter call in the pipeline, we continue to see sort of slower activity out there as it relates to a number of airlines that are looking. There have been increased discussions with a few airlines, but there hasn't been a big pickup relative to what we have seen or stated in the first quarter.

And you can see in our same-store sales or ongoing PB growth continues to be strong at the levels of what we see employment growth. So we're -- that gives us a real substantial base to work from next year.

Understood. And then just on the Travel Network share decline, it looks to be about 70 basis points year-over-year in 2Q. And clearly, you called out some weakness in APAC, which you'll remedy with Flight Centre conversion. But I'm wondering about Latin America, which has historically been an area of strength for Sabre. What led to the decline in bookings there of 4%? And are there any actions you can take to remedy that situation?

Yes, David. Our share did decline somewhat given -- driven by our base of agencies growing slower, at a somewhat slower rate than our competitors' customers. If you look at it overall, our methodologies have changed the same. You can bounce around from quarters to quarters

In Latin America, just reminding everybody, it's the smallest air travel market. And there, the fluctuations really are a little bit greater, based on some of the larger OTAs and who's growing there and who is getting the majority share with those OTAs versus a minority share. And that's the factor for the swing in the second quarter. We have taken actions there to shore up, and we expect to remain the leader and be competitive in Latin America.

Just a quick final question. Curious for your views of American's $2 incentive fee to travel agents for using the NDC connection. Do you see that having any impact on your North American business?

No, as we look at -- and this gets into the comments that I had made earlier, is there's a lot of activity taking place relative to just distribution in general. And it does get into how carriers are looking at driving more revenue, really getting into dynamic offers and capabilities that are out there. The one thing that we continue to talk about and I think it's important to understand, is that making that step, which really gets into more of a direct connect, does not really address the costs associated to how do you actually make that work within an agency, the mid- and back-office capabilities and the cost associated with that. It's why when I look at the broader opportunity and look at essentially where we're focused, it is much in line with making sure that we're helping enable them to do what they want to do. And it's not only American Airlines, but it's other airlines that are out there, and I think what we will continue to find is that the best way of actually selling products and services is through the GDS, but we need to continue to invest in capabilities to be able to do that. The one thing that we've often talked about is when you look at ancillary revenues, the vast majority of ancillary revenues are sold through the direct channel, meaning through the airline.com. So I'm talking probably 90% plus. This is where we see a real opportunity to continue to enhance our selling through the GDS, it's the enablement of that taking place. But again, it's working with each of the airlines out there and what they're trying to do. I will add just another comment is as we look at NDC and what's taking place with NDC, because I know that's top of mind for a number of individuals that are out there, that there are a number of conversations that we have as it relates to what carriers want in NDC. And what I will tell you is that it is different by each carrier. The other thing that I will share is if you look at essentially the standards that have been put out there, there's been 17 standard changes in the last 4 years, and this is one thing that we have been focused on, is we have to have specific standards or standards to stay really consistent that we build to. And in doing that, the thing that we look into the future, it's making sure that we're just not building one-off solutions for specific carriers, that there is a more of a prioritization of what needs to be developed and when it's developed.

And we'll go next to Jim Schneider with Goldman Sachs.

Maybe just following on, on the earlier question around bookings share. I guess, to put it a different way, with the go-forward look, you talked about a number of the new agency wins driving accelerated bookings growth in the back half of this year. But I guess, how should we think about the base off of which that grows? In other words, do you think that the temporary share loss -- is the share loss you saw in the current quarter was more of a temporary blip? Or do you think it's something that's going to be with us for another few quarters given the share within some of those agencies in LatAm and APAC?

Jim, I do think it's more temporal. And again, looking at the conversions that we know are coming in Europe, Middle East, Africa and North America give us that confidence in how we manage Latin America that I mentioned earlier.

And then maybe as a follow-up, just in terms of how you're thinking at the very highest level about investments the company is making in technology? And I guess, squaring the thoughts on insourcing of shopping and a bunch of other investments that you've talked about versus the pushout in CapEx and whether or not that will actually drive kind of an increased CapEx in 2018 or not? And can you maybe talk about the kind of pay-per-drink strategy you're employing, because it seems a little bit different from what you talked about before?

So Jim, this is Rick. I'll start, and let me just be very clear. The capital intensity of the business is reducing. We've seen that in Q2. I've quantified that for the rest of 2017, and that's an important element of how we are making sure that the capital expenditure for product and our underlying technology plan for security and stability is getting the return on investment that we need. That allows us then to free up money and put it into places where we have the strength, we have the leadership, whether it's the next level of NDC, next-generation retailing, next-generation distribution, really focused on the airlines reservation PSS product and continuing to build out the industry-leading single-instant, multi-tenant SaaS-based, cloud-deployed central reservations property management systems in hospitality. So we've got a lower level of capital intensity this year and looking into 2018 through those actions.

And let me add on. This gets into a lot of the work that the team has been doing as we have really done a review of the business units, looked at a number of things that were taking place throughout the organization. And the way that we really broke it down was looking at each of the businesses, understanding the strategic initiatives, the strategic focus that's aligning to what our customers need and then really going to the prioritization process of what are the things we want to make sure that we're investing in and investing in the right fashion, that's going to allow us to do essentially what we think is going to enable the industry. In doing that, it gets into how are we going to essentially look at CapEx and making sure that the alignment is there. And in doing that, it allows us to have a more focused approach as we move into the back half of this year as well as into 2018, which essentially falls in line with what Rick said as we're managing the CapEx.

And Sean and I said at the beginning of the year that we expected 2018 to be more similar than not to 2017. And when that came to cash flow, as we've mentioned today, with these actions, this focus and the intensity of capital expenditure in the right places, but moving down overall, it allows us to have this expectation that the revenue growth, which continues to be strong at Sabre, you can see the similar kind of dynamic of growth in free cash flow in 2018. That's our expectation.

And there's other things we continue to tackle. You asked about just sort of the data, data management strategy. And this is part of what Joe brings to the table in joining the organization, is a lot of expertise in this. We have good expertise already, but how do we continue to look at cloud opportunities? How do we continue to look at ways to diversify that allows us to have high quality and essentially high reliability but allows us to find ways of reducing cost at the same time? The other thing is continuing to look at just as we look at ways of improving the development and what we're doing from a development perspective, not only in development centers we have around the world, but how do we continue to leverage those to make sure that we're getting the ability to drive more efficiencies and capabilities.

And our next question will come from Mark Moerdler with Bernstein Research.

Two questions. The first one is bookings growth of 2.6% passenger boarded, 5% organically. What's driving the difference there? Is it just a timing issue? And then a follow-up.

Just really kind of timing. And again, that 2.6% was the air bookings, very much similar to our biggest competitor, the 2 of us drive most of the air bookings through the GDS. The passengers boarded, as mentioned, the 5% organic strong and consistent. We had 8% overall passenger boarded there, Mark. So we think it's shaping up largely as expected. I'll point out we had very strong growth in Q2 in margins in Travel Network last year. This year, a little bit less so, but I want to reiterate that overall for the year, we're looking at a revenue growth that's strong. We've got the bookings growth in the back half accelerating, and all that leads to reiterating our target for the EBITDA margin of 39% to 39.5%.

Two other things on that. Bookings come before are actually PBs. So you're doing a lot of booking in first quarter, that actually turns into PBs in the second quarter. So there's a timing issue associated with that. The other is you sort of have apples and oranges, right, when you look at PN in the bookings, it's global in nature. PBs are really based on the customers that we have, so there's a few differences.

Beautiful. That's very helpful. Quick, a little drill-down color. Can you give a little more color on APAC? Obviously, Flight Centre is going to help going forward, but is there anything else underlying it at Flight Centre that we should just keep an eye on?

The couple of things that we've seen there has been more probably in Korea, Japan and India, is just high-level growth of certain customers. And as we've talked about, when you look at customers that we don't have, those are 3 regions, specifically India and Korea, that we've seen that has been high growth in agencies there that we actually don't have any penetration. So they've been outgrowing the marketplace. So that has been impacting what we've seen from a share perspective.

And Japan's been a slower growth market and we have a high share there.

And our next question will come from Ashish Sabadra with Deutsche Bank.

Just wanted to follow up on the earlier questions on free cash flow growth. So free cash flow is expected to grow in line with revenues in 2018 despite the $110 million of cost savings from the restructuring program. So I just wanted to better understand why doesn't the $110 million of cost saving flow to the free cash flow? What are the puts and takes on the free cash flow next year?

Yes, Ashish. What we said is we continue to invest for the things that are going to differentiate, meet the customer needs and provide the overall investment into next-generation retailing for our airlines, for our hoteliers, for the agencies and while we assure that we continue to have industry-leading stability and security. And that's essentially why '18 will still look more like '17 than not, but we've been able to get the free cash flow expected to be growing with the revenue. We'll point out again, related to that, that AS growth is slower for the reasons of losing Southwest or the push and the loss of Air Berlin and some of the selling that's been slower last year and this year. Again, all of those being addressed, in good shape with that and we'll look to then reaccelerate. But those are the 3 reasons.

And maybe just a quick follow-up on Hospitality Solutions. That slowed down a bit this quarter. So I was just wondering how should we think about the hospitality growth going forward and puts and takes there on the growth profile.

Yes, we had 10% growth there in the quarter. You're right, we've been running organically in the teens growth. We think that's absolutely possible. What we've shown again is there's still a lot of growth around the world in the independent hotelier section, where we lead in central reservations, and where we're only getting started on property management. So again, property management is still relatively small in our total revenue mix. We've rolled out very successfully in the limited service with Wyndham, but we will then begin to bring that on into the independents and other enterprise. So we see the opportunity in hospitality just as bullish as we always have and consistent with the results we've demonstrated.

And maybe one final question is just how should we think about the EBITDA at the segment level with the new guidance?

EBITDA at segment level, again, Travel Network for the full year, 39% to 39.5%. On the solutions business, about 100 basis points of pickup from last year rather than the previous 200 and again, it's related to the items we've talked about extensively here today.

And next, we'll go to Abhey Lamba with Mizuho Securities.

Sean, I wanted to follow up on your earlier comments for NDC. Taking a step back, what's happening currently in the market that we've started to hear more and more of these discussions come up with multiple airlines? How do you think this will play out? And also, if you can comment about the Lufthansa situation. Are you seeing other airlines use that as an example in your conversations with them?

Yes, so let me start with Lufthansa, but then I'll go back to NDC. Lufthansa, there really has been no change there. Again, we continue to have dialogue -- the data that we have continuously tracked, really continues to show that when we look at indirect and direct bookings, they have essentially come back in line from a capacity growth perspective. So very much in what I've spoken about, they just sort of hit this plateau. You sort of hit this plateau and flatten out for a period of time. Let me spend a little bit on just NDC. So a lot of activity, a lot of discussion and it's important to -- and I'm just going to take a moment to really walk through the 3 levels of NDC and what that means and then comes back to what is the responsibility of Sabre or the other GDSs and then what is the responsibility of airlines, because this is something I don't think people completely understand and it's important as we have our discussions, we get into a lot of questions with airlines. I'm going to share some of those with you because I think it's important. When you look at level 1, it's really just ancillary shopping, and we do that today for American Airlines. If you look at Main Cabin Extra and the capability of them really being able to do dynamic pricing after the transaction is done, that's really level 1, and we have that in place. When you have level 2, level 2 is one where essentially, there's a difference in who is actually putting the offer forward. So today, if you're shopping from, call it, Salt Lake City to Minneapolis, we put that together from a shopping algorithm perspective. And in doing that, we go out and we seed the schedule, we go out and we pull the inventory, and we go out and pull the price and bring that together. How that would change is it really allows the itinerary creation, the inventory and the pricing to be done by the airline. So what ends up happening and is this why airlines look at doing this, is that they may look at the itinerary creation and say I don't want that individual to fly nonstop. I may want them to connect. Or I don't want them to connect, I want them to fly nonstop. That turns into essentially the itinerary creation. They will pull from their own inventory, and they will use their own pricing. So they may be using ATSC, which is our shopping engine. They might be using QPX, which is ITA's shopping engine to be able to do it. So they have created that offer and it can include just the fare, but it can do fare and ancillaries or it can do fare and other products and services. Under level 2, we still have to manage that, so they are not doing really the order management. The order management is still really required on the air -- or on the GDS side. Now when you go to level 3, it's really you're doing everything that you do under level 2, but the order management now is pushed into the airlines actually managing that. And when we look at that, it really does get into a number of questions relative to who's doing what and how is it being managed, because when we look at, we have to look at it from the aggregator side, which is really on the GDS, and what are the integration points as it relates to the GDS. Who -- what's the architecture diagrams? How is shopping taking place? We get into a level of complexity that is out there. The one thing that we have been talking about continuously over the last 12 months or so is just volume and what's happening from a volume perspective. And when you are essentially doing the order or the offer and the order management, all of that volume gets shifted to the airline. And I'll share with you some of the comments that I've had with certain airlines in that they put direct connects in place with OTAs in China, for example. And they're finding that the look to book is then 10,000 to 12,000 to 1. And their statement back to me is "Why? Wow, that's a lot." And then it gets into how are they essentially looking at the algorithms? How are they looking at caching? So this is where you get into a level of detail that I don't think a lot of people understand. These are questions that we have as it relates to airlines and what they're trying to get accomplished. Now let's do this by a number of airlines and if they're thinking a little bit differently. That's where I say take a step back. Let's make sure that when we're looking at it, and as I mentioned earlier, as we look at next-generation retailing, next-generation distribution, we're all driving to the same place. It's how do we increase the revenue pie? How do we create better economics for everybody? But making sure that we're doing it in a fashion and really does look at long-term solutions just not point solutions. And I think in some cases, that's what we're finding with NDC.

So there's complexity that needs to be mastered. There's scale that's got to be obtained in order to manage the cost at every level of NDC, whether it's Tier 1, 2 or 3. And again, Abhey, that's where we think we're well-positioned to master that and as the different players start to look at that and realize it, not everybody can achieve those kinds of mastery of the complex or scale at a sustainable cost. That's essentially what a GDS does very well today. And as we extend that across, looking at distribution of the direct, the indirect channel and operationalized in the airlines reservation system, we think, again, as we said, we're one of the very few handful of technology providers that can work with airlines, work with agencies, with hoteliers to master that at scale.

Got it. And Rick, if you can just let us know how should we think about accounting 606 adoption on your revenues and margins next year. That's it for me.

So accounting 606, we've gone through the work there and preparing for that. We'll retroactively adopt. We've got more detail on that coming out in our 10-Q. It'll be filed later today. And excuse me, we'll have the modified retrospective transaction method. We really think there was minimal impact in Travel Network and Hospitality Solutions, but there will be some impact on Airline Solutions, and we'll update you at the next quarter on that. Well prepared for it.

And next, we'll go to Brian Essex with Morgan Stanley.

I guess, question for Sean. Just to kind of take another high-level step back at this and all the transition that the company's gone through in the year. Certainly, a lot of transition at the executive level and spending initiatives, whether it's on a network or applications or availability and uptime. I guess, as you kind of communicate these changes to investors, I guess, is there an overarching philosophy that you're employing in terms of that communication process, how you anticipate this transition to unfold over the next couple of years and then is there an inflection point or a point where you might be able to stick -- draw a line in the sand and be able to give investors a clearer view of what the sustainable or long-term operating performance that this company might look like, and might it be different than the previous long-term views that, that management team had, had?

Yes. I'm happy to address that. If you look at the first 6 months, a lot of transition taking place, and I'll start really at the executive level. You had individuals that had left the organization for different reasons. We spent, and I have spent, an enormous amount of time making sure that as we looked at new executives coming on board, it's really bringing in the talent that's going to allow us to continue to move this organization forward and address some of the things that we see as really strategic opportunities. And you always have the capability of, when you're going through that change, what is the talent level that you really need. And the balance for me was having a level of industry expertise, but when you look at us from a technology perspective, how are we making sure that we brought in individuals very similar to Dave Shirk and Joe DiFonzo, that have worked not in the industry per se, but they've been in very complicated organizations that understand portfolio management. They understand data center management. They understand a number of the things that we have to be from just a high-resiliency perspective. So that was a big part of what we have been laying the groundwork in, is getting that executive team in place. The other thing is really focusing on where we're spending money. What are the objectives? What do we want to do? Again, when I mentioned Travel Network and hospitality, I'm very comfortable with what we're doing. Flight Centre is in the early stages of transitioning in Australia, New Zealand right now. I can tell you that they are tickled with where the product is. There's a lot that's going on, so the momentum that's there is really good momentum relative to what we've invested in. And it goes back to what we started last year. So I continue to be happy with what we're doing there, the road forward. And I think it actually expands when we start talking about next-generation retailing and distribution, because that's where this all evolves to. Hospitality is one that as I continue to spend time with executives on the enterprise side specifically, what the -- what they're seeking. I'm still very bullish on those capabilities and what we're doing. So again, it's accelerating into that opportunity. There's the pipeline that is out there. We continue to manage those opportunities.

Airline Solutions is the one where we probably spent the most amount of time. And it's just looking at the portfolio. And as I had said, really from the beginning, is there's nothing that I can really argue with from a product perspective that -- they're not products and services that customers want. But you also have to be careful on how broad that portfolio gets and the investment requirements that are taking place. So that is the narrowing of what we're doing. But if you take it to sort of a higher level and you look at it, and this is how I try to explain it to the employees and to others, is when you look at our business, it's really about -- and I'm looking at this from the hotel and as well as the airline side of the equation, is how do we help them sell the products and services? How do we do it in a way that's going to allow them to drive revenue and it does get into indirect and direct, but it's really about distribution. What we do is not Amazon.com and nothing against Amazon, but it's not that you go to the Amazon site and you purchase something and it gets -- it's in a fulfillment center, puts it in a box and gets shipped. Once we sell products and services, we also sit in, we have to deliver those, be it through the property management system or through the PSS. And that is the focus and that is the core. How do we make sure that those are integrated really well to enable the selling of products and services and delivering of those products and services? Because when you begin to build around that, you begin to see that this is where data and analytics come in on how do you continue to find ways of increasing revenue opportunity and selling, because we sit on an enormous amount of data. How are we looking at revenue management going forward? Because revenue management and pricing is changing. One thing that is another thing that airlines will be dealing with as they move into a world of dynamic pricing is they do have interlines, they do have codeshares. There's joint ventures and everybody isn't going to be in the dynamic world, so there's going to be the old world and the new world. How are we helping bridge that? You continue to take layer sort of go out from there. But when I look at it, very much in the place of the executive team that I have now, is the team. We have one more piece to put in place, and I think we'll be in a position to be able to have that done within the next 30 days, and my executive team is set. And that's really important, because this is the team that is going to be driving the business forward. This is the team that is essentially going to change the way that we run the business internally, be aligned in what we need to do and be successful. So I'm very comfortable with the steps that we're taking. It has been one that we've been doing a lot to be able to get to this point. And I think as we get into 2018, I feel comfortable with how we're setting up 2018. I think we continue to build more momentum and a lot of this really begins to come to fruition in the back half of 2018. So this is how I look at it from a high-level perspective, the amount of work that's taking place. As I look at it and tell the team members here as well as the executive team, I'd like to go faster, but there is a pace by which you can do things and there's a lot that's going on in the organization. And as I mentioned in my opening comments, I'm comfortable with where we sit right now, and I'm comfortable with the direction. And I think I have a clear understanding of the opportunity as how do we make sure that we aggressively manage to that with the technology and capabilities that we have within this organization.

And we'll take our next question from Matthew Broome with Cowen and Company.

Can you give us any more detail on how the rollouts of the new Sabre Red Workspace is going?

Yes, Sabre Red Workspace is going very well. Sean mentioned Flight Centre was, I think you said, tickled with it and I think that's right. I mean, obviously, we, as a team, are all very close to how that's being deployed and rolled out. And just a reminder, it sits on top of the Sabre Red platform. And the Sabre Red workstation, essentially our API that is the tool that the agencies use and sitting on top of that platform. We believe it's leading -- industry-leading. It allows agents to use the most modern graphical user interface or toggle behind the older algorithms that they've used in the so-called old green screen. And we've shown that they can be more effective with the Sabre Red workstation. And we did that as a pilot, as you'll recall, with Flight Centre in Canada, when we picked up that business. It was very much determinative in having them select us for their lead GDS and picking up the business in Asia Pac. And we're rolling that out very well. Importantly, though, is the -- what it's doing for us and we've talked about other agency conversions and the benefit that that's going to be to the whole community. This just isn't an instance for Flight Centre. It's -- they're the first one. They helped inform and refine and accelerated some of the things that we did, and that's going to benefit the community of all agencies. And we think we've got something that's differentiated in the marketplace. So going very well.

The other thing is we have agencies that are queuing up behind Flight Centre relative to converting over to the Sabre Red Workspace, so that's the important piece. The other thing that I do want to call out that -- and this really builds off of what Rick was saying as it relates to the platform and the APIs. Those APIs can be absorbed. And I did mention it in my comments, can be absorbed, and it's not -- it doesn't have to be the full product, so there can be some certain capabilities that we have via APIs that we're all willing to offer up to other agencies that are out there that they may be as it relates to trip management or it could be in just booking tools, that we're making those accessible as well.

Building an ecosystem and platform where innovation comes from Sabre and it comes from other players in the ecosystem and builds into that platform.

And next, we'll go to Jed Kelly with Oppenheimer.

Back to booking shares. Is there anything to call out in regards to the global OTAs share other than LatAm that you mentioned earlier? Any changes you are seeing in the OTA channel over the past 12 months? And then as the global carriers start to offer more basic economy fares, how are conversations with the OTAs progressing? And what type of solutions can you offer? And I have a follow-up after that.

Jed, this is Rick. I'll take the OTA. No, it really is the big dynamic is in Latin America. We don't see any change in how that's going forward. We're very comfortable with what our share around the world and in the markets are with OTAs. We've been, continue to be at the forefront of that and making sure that we invest to service them. Sean, maybe on the, global carriers?

As it relates to -- Well, I'll touch on one thing, on just OTA in general, we see that it's actually relatively flat right now. There wasn't a big share increase, OTAs versus brick-and-mortar. So not that, that has stabilized for a long period of time, because we have been seeing this shift over really the last 5 or 6 years, but it has stabilized a little bit. The capability of OTAs in selling really the basic economy, that is out there. We enable that. When you look at OTAs, it's a little bit different, and each of the OTAs has a little bit different strategy relative to the air potentially being the loss leader to the hotel, selling the hotel. It's how do they actually want to sell it and do they -- are they selling ancillaries on top of that? So again, this is something that we enable, and it really gets into the strategy by which the OTAs want to sell the products and services and it becomes a discussion between really an airline and an OTA.

That's helpful. And then one more is how should we think about the Wyndham contract as it relates to outer year hospitality growth? And does that contract starting to roll off present any type of headwind to 2018?

Yes, Jed. This is Rick. As I said, we're well deployed in terms of the vast number on the limited service property management. We still have quite a bit of conversion to do on the reservation. Remember, on CRS, they were going from 4 systems to one, and we're doing it brand by brand as we go through that. So we're still going to get some continuing benefit from that here as we go through the rest of the year.

And that will continue a little bit into 2018 as well, to ramp up.

And next, we'll go to Brad Erickson with KeyBanc Capital Markets.

I think you mentioned LATAM sounded incrementally better on ramping first half next year, so wanted to confirm that, that was the message. And then second, just any update to Copa and that implementation as we look out into '18 and '19?

Sure, Brad. On LATAM, there's no change, I was just reiterating exactly where we've been, on schedule there. And then Copa, as we said, they shifted their focus for a time and we continue to sell to them other solutions, work with them and we'll see what happens in terms of their decision on reservation, so nothing to update there.

Got it, and then just secondarily, this has been tossed around a few times, but on the IAG portal and the surcharge there, what -- can you kind of talk about just what your formal expectations are as that ramps in November? Is it such that you would expect to see some falloff in volumes, but offset by the better pricing? Or just kind of what are your formal fundamental expectations around the dynamics there?

Yes, so we're spending a lot of time in discussions with IAG relative to really what they're driving towards as it relates to their strategy. There's a number of discussions and will continue to take place as we look at what essentially will be the selling mechanism or how it will be sold, what agencies will be driving certain things. So there's a lot that's still in play right now, so to give clear definition, we're just not in a position to do that.

Brad, just as a reminder, I mean, IAG, particularly BA and Iberia, which are affected by this, are less than 2% of our GDS bookings. In that way it's in about the same size range as the Lufthansa Group.

And next, we'll go to Neil Steer with Redburn.

Just a quick one. $25 million spend, but the annualized savings of $110 million seems quite a lot. Could you just give us some color on how you're going to get a payback of over 4:1?

Just is where it is, Neil. We've reduced very heavily in the VP and above ranks. And so again, I think sometimes with force reductions, people say, geez, you really aren't getting much economically because you're looking in places where the cost basis is low. This was a determined effort to make sure that we haven't touched developers on the product and all of that, that's important, number one. First, I want to emphasize that. And then it's taking out layers of essentially higher-cost employees in management that with the improvements that we've made to our systems, our tools, our technology and our focus, we're able to do that. So I would acknowledge that you get a little bit more economic gain for the impact there.

Yes, let me add. I mean, $25 million is really related to severance. You get the full year savings, that's where you get to the $110 million, so that's a simple breakdown.

And I know this is potentially quite commercially sensitive, but there are clearly parts of the Airline Solutions that you're actively deemphasizing. Does that then have a follow-on effect in years to come in terms of the revenue trajectory of that product set?

It allows us -- I mean, this gets into what is actually producing, what is not producing and as we continue to look at what's going to drive the business, it's what we've talked about for a period of time. And part of this is what we've articulated really throughout the 6 months, is there's a number of products that were in development that really weren't driving a lot of revenue. So again, it's being really focused on the ones that are going to drive revenue, going to drive return and are strategic as it relates to a number of things that I was commenting on earlier. Rick, I don't know if you have anything else to add.

Yes, first, it's focus on really the core, which is reservation and the connected airline on some of the revenue management optimization projects that we -- products that we have in AirVision. And Neil, then, secondly, it's don't continue to invest in the intensity of the other products that we had in the past given the return and what customers are willing to pay to buy to them. But there isn't any decision yet that we've communicated on any further than that.

And next, we'll go to Dan Wasiolek with Morningstar.

So based on your earlier commentary on going through these transitions and kind of how you're balancing capital allocation and shareholder return and is shareholder returns such as buyback something that you guys are looking at as being opportunistic? Or how does that kind of prioritize within the spending back into the business?

Yes, thanks, Dan. We look at everything through the return on -- lens of return on invested capital, whether it's investment in the organic business, it's M&A or it's share buybacks. And we're working under the $500 million authorization program on the share buyback. We aim to offset over a year period, a year-ish, the rather by technology company standards, modest dilution of about 5 million-plus shares. And then within that, we do work a program and opportunistically within any quarter. So I gave you the numbers of what we've done through the first half and we'll continue to execute on that. We've got the capital structure and the strength and the flexibility to continue to pay our dividend, have it grow with the growth in net income and then use flexibly the share repurchase under that $500 million authorization.

And that is all the questions we have for today. I'll turn things back over to Mr. Menke for closing remarks.

Great. Thank you very much. And again, I want to thank everybody for their interest in the organization and getting the update on what's taking place. As I had mentioned, a lot of good momentum as we move into the second half of the year, and we look forward to continuing to share the progress in the months to come. Thank you very much.

And that will conclude today's conference call. Thank you, everyone, for your participation. You may now disconnect.