Sabre Corp (SABR) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Sabre Second Quarter 2018 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 a property of Sabre. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the company is strictly prohibited.

I would now like to turn the conference over to Senior Vice President of Corporate Communications and Investor Relations, Mr. Barry Sievert. Please go ahead, sir.

Thank you, Kelianne, and good morning, everyone. Thanks for joining us for our second quarter 2018 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, operating income, 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'd like to advise you that our comments contain forward-looking statements. These statements include, among others, disclosures of our guidance, including revenue, EBITDA, operating income, net income, EPS, cash flow and capital expenditures; our expected segment results; the effects of changes in accounting standards and U.S. tax reform; 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 the actual results to differ materially from the statements made on today's call. Information containing the risks and uncertainties that could affect our financial results is contained in our SEC filings, including our 2017 Form 10-K and our first quarter 2018 Form 10-Q.

Participating with me on today's call are Sean Menke, our President and Chief Executive Officer; Doug Barnett, our Executive Vice President and Chief Financial Officer; and Rick Simonson, senior adviser to the Chief Executive Officer and former Chief Financial Officer.

Sean will start us off and provide a review of our strategic and commercial performance. Rick will offer additional perspective on our financial results and the forward outlook as well as formally introduce Doug. We will then open the call to your questions.

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

Thanks, Barry. Good morning, everyone, and thank you for joining us today on our second quarter earnings call.

Before we get into the details of the quarter, I do want to take a moment and really thank the employees of Sabre. Without their dedication, focus and commitment, we wouldn't have made the progress we have achieved over this past several months. I'll share with you that in a recent global town hall, I told the team members that we're moving on to the next chapter. We've taken significant steps to improve stability and quality of our products. We are deeply engaged in strategic conversations with all of our customers around the world and have turned around our financial performance and driving in the right direction. Many of the things we've recently announced couldn't have happened without the progress we have made together as a team. I sit in a very enviable position of watching the transformation and acceleration occur. We still have work to do, as I continue to tell everybody, but I couldn't be more pleased with what we have accomplished and the company we are building.

Over the past 18 months, we significantly strengthened our position as a trusted and innovative technology partner while reinforcing our commitment to leading the next-generation technology. Our momentum is increasing, and the second quarter was continued evidence of our progress. The macro global travel environment was supportive, and as a global leader, we benefited. We saw strong share gain at Travel Network and wrapped up large implementations, including SabreSonic at LATAM and the SynXis Central Reservation System at Wyndham, the world's largest hotelier. The strong second quarter results give us confidence in our full year outlook and business trajectory.

Let's look at our performance for the second quarter. Another solid quarter demonstrates the financial rigor that is supported by our refresh strategy. We enjoyed highly recurring revenue, driven by travel events, which have grown at multiples of GDP over many decades. We believe our proven global scale and innovative industry-leading solutions cement our position as a global technology leader across retailing, distribution and fulfillment of travel.

At Travel Network, we've been talking about new business wins and conversions. We saw these come to fruition in the quarter, with resulting strong share growth that we expect to sustain. For the quarter, we saw global share increase 1.1 points to 37.1%, with share momentum building throughout the quarter. June share was up 2.4 points to 37.7%. This strength has continued into the third quarter to date, largely driven by brick-and-mortar agencies, specifically large travel management companies.

We signed 12 new supplier agreements in the quarter, demonstrating carriers around the world continue to look to Sabre Travel Network for cost-effective global distribution, access to more valuable travelers, away market reach and a consistent personalized retailing experience across all channels. We have signed over 20 GDS renewals year-to-date, including key agreements in the quarter with Aeromexico and Aerolineas Argentinas.

We recently announced our new collaboration with Booking.com to give our Travel Network agency customers access to all Booking.com listings, including its alternative lodging listings. They will be made available to the Sabre Travel Network content services for lodging solution that is launching later this year. Booking.com offers more than 28 million listings, and this partnership will enable our travel agency customers to meet the growing demand for alternative lodging options and deliver increased value to the travelers.

Airline and hotel retailing has become increasingly complex, and having a tool that can display and sell those offerings consistent with the suppliers' brand promise is vital. At the same time, agencies are at a critical point where they need to drive increased value to grow while hiring new talent to support their businesses. With the new Sabre Red Workspace, we serve both sides of the marketplace with the proven efficiency and productivity of an intelligent booking platform. The global rollout of our new Sabre Red Workspace continues to progress and is delivering results for our customers and Sabre. Our new tool is highly effective with a user interface and user experience that is changing how agents work and serve their travelers. In fact, one of the largest travel agencies in the world that recently converted to the new platform has reported significant improvements in the things that matter most to agencies, including a material increase in new agent productivity, a mid-single-digit increase in conversions and increases in commissions and overrides, all while offering their travelers an increasing menu of choice.

At Airline Solutions, excluding the impact of ASC 606 and the last quarter of the negative comparisons related to Southwest Airlines, revenue growth was strong and better than we expected coming into the year. We continue to have good sales momentum across our AirCentre operations portfolio, and we grew our share of wallet with several customers in the quarter. This included a win at China Eastern Airlines to upgrade to our next-generation AirCentre Flight and operation solutions as well as expanding our footprint with Vietnam Airlines and Aerolineas Argentinas, where we signed long-term PSS and technology platform renewals in the quarter.

In May, we successfully completed the final phase of our SabreSonic reservation system implementation

(technical difficulty)

the largest carrier in Latin America, adding approximately 35 million passengers boarded on an annual basis. Among our other implementations, we completed our first

(technical difficulty)

implementations of revenue optimizer with Ravn Alaska and Ethiopian Airlines.

As we discussed at our recent Investor Day, we undertook a sharp focus on driving version consolidation and accelerating customer upgrades. We have made great progress this year. For example, all customers of SabreSonic Interact, our real-time graphic user interface that dramatically simplifies the call center process and efficiently facilitates airport operations, are now live on n or n-1 versions of the product. We continue to advance the development of our Airline Digital (sic) [Digital Airline] Commercial Platform, with the first phase expected to roll out in Q4 of this year. This solution features deeper integration and significant capability enhancements to our SabreSonic reservation system and AirVision commercial products, including NDC-enabled offer and order management.

In Hospitality Solutions, revenue growth accelerated from Q1. We saw a continued strong growth in Central Reservation System transactions and related SynXis software and services revenue. We expect growth to further accelerate in the second half of the year, consistent with our expectations coming into 2018 for this core part of the business.

We signed new wins, key renewals and increased share of wallet at hoteliers around the world, including Margaritaville hotels, Two Roads and Playa Hotels among others.

Finally, we are pleased to announce the successful completion of the Wyndham central reservations implementation, with 2,500 properties at Super 8 migrated in May and the final Hawthorn Suites, Microtel and Wingate brands completed in June. Our improved stability, product quality and commitment to enabling next-generation retailing, distribution and fulfillment across both of the direct and indirect channel are resonating with customers and our momentum continues to grow.

Our industry sits at a moment in time that is ripe with opportunity to leverage next-generation technology to enable our customers to increase revenue and improve the traveler experience. Although the travel industry has lagged other in adopting leading technologies like machine learning and artificial intelligence, the need for them is clear. Our airline customers are challenged by stagnant fare pricing, rising fuel and labor cost and heightened competition. Hoteliers face competitive encroachments from new online entrants that are now household names. Agencies must continually find ways to provide more value for their corporate and leisure travelers while managing cost. We believe our next-generation technology can unlock our customers' ability to overcome these challenges, grow revenue and better serve travelers.

To take full advantage of this opportunity, we took the additional steps in realigning our organizational structure and making important additions to our technology leadership team. First, we created Travel Solutions under Dave Shirk as an umbrella organization of our Travel Network and Airline Solutions. The new structure will enable us to go to market more effectively and better serve customers as one Sabre. It will align our product development efforts across the continuum of retailing, distribution and fulfillment in areas like GDS technology, the SabreSonic passenger reservation system and our NDC-related products.

Second, we announced the creation of a dedicated data and analytics initiative to accelerate our efforts to unlock the value that exists within our rich data.

Third, we accelerated our technology strategy with the important additions to our technology leadership team. Sundar Narasimhan joins us as SVP and President of Sabre Labs and Product Strategy. He brings over 25 years of relevant experience, including his most recent job, leading Google's hospitality efforts. He previously served as the CTO of ITA Software, where he led the development of the 1U distribution platform and launched the ITA airline passenger reservation system prior to ITA's acquisition by Google.

We'll leverage his deep experience and expertise to lean into emerging technologies and drive our future product strategy and road map. Sundar will lead an expansion of our Sabre Labs efforts that focus on the development and application of emerging technologies in the travel space. We'll be opening a new office in Boston to support these efforts, taking advantage of the deep pool of artificial intelligence, machine learning and travel technology talent that exist in that market.

Louis Selincourt joins us as SVP of Global Development Centers. Louis brings world-class leadership to the management of our Global Development Center footprint with a focus on implementing processes that drive quality and productivity and help make Sabre an employer of choice around the globe, with a particular early focus on our major development operations in Dallas, Bangalore and Kraków.

Finally, I'd like to introduce our new CFO, Doug Barnett, whose finance, technology and operational expertise make him the ideal leader to help build upon our strong foundation and execute the next phase of our strategy. I'm grateful to Rick for his many accomplishments as Sabre's CFO. He was instrumental in executing our IPO, oversaw divestitures and acquisitions that have made us stronger and more focused, led significant improvements in our financial reporting and forecasting and helped craft and implement our strategy.

Many of you have followed our story and results over the last 18 months. It is clear we are making tangible progress against our strategy and deliverables we articulated. The momentum we have gained gives me great confidence as I look into the future.

With that, I'll turn the call over to Rick to get into more of the financial details. Rick?

Thanks, Sean. Turning back to Q2 results. Strong 9% revenue growth was driven by 13% growth in Travel Network revenue. We had a supportive bookings environment. We gained global share and benefited from higher-than-expected growth in average booking fee in the quarter.

In Airline Solutions, we had a modest decline in revenue as we continue to absorb the revenue reduction impact of accounting standard ASC 606 and the final quarter before the anniversary of the Southwest Airlines demigration. Hospitality Solutions revenue accelerated, and SynXis software and services revenue growth was strong.

We're making good progress on our technology evolution. And as expected, we saw an expense rotation to higher operating expense, offset by lower overall capital intensity, primarily related to our cloud migration.

Earnings per share increased 6%. Our global scale and reoccurring transaction business model drove growth in cash generation. Strong free cash flow of $79 million in the quarter is expected to put us on track to meet our full year free cash flow expectations.

Looking a bit closer at Travel Network in Q2. Our top line growth of 13% supported an increase in operating income of 7% for the quarter. As expected, profit growth was a bit lower than revenue growth. Approximately 2/3 of the margin decline was driven by incremental incentive expense, primarily due to the completion of the Flight Centre conversion, some agency consolidation in Europe and a bit of unfavorable FX. Approximately 1/3 of the decline was driven by increased technology operating costs, as our cloud and other initiatives drove a rotation of cost from CapEx to OpEx.

As always, we seek to invest for sustainable share growth that we expect will drive positive free cash flow as share increases. As a reminder, we start to anniversary the Flight Centre migrations over the back half of the year, and accordingly, expect incentive fee growth to begin to moderate in the second half. We expect supplier and incentive rates to become more normalized and grow in line as we get into 2019.

Total bookings. Our bookings increased 8%, reflecting the supportive global macro environment across most regions of the world and global share gain, driven by the completion of the Flight Centre migration, increased share at brick-and-mortar agencies and specifically large travel management companies and the conversions of other new agency customers.

Q2 bookings growth was supported by an increase of 23% in Asia Pacific, driven by Flight Centre; strong market growth; and executing well on our leading position in the region. Excluding Flight Centre, APAC bookings increased a strong 6%. Bookings increased 5% in North America and 5% in Europe, Middle East, Africa as we increased share, again particularly with large global travel management companies. Bookings in the smallest market, Latin America, declined slightly due to unfavorable economic factors in the region. In total, Sabre global bookings share increased 110 basis points in the second quarter to 37.1%.

At Airline Solutions, underlying revenue growth was strong in the quarter at 8%. This adjusts for the impacts of ASC 606 and the Southwest Airlines demigration. Including those factors, revenue declined 2%. SabreSonic and the combined AirVision, AirCentre revenue both declined low single digits. The year-over-year impact of adopting ASC 606 resulted in a $7 million revenue reduction in the quarter, primarily in the AirVision, AirCentre portfolios. We also saw a modest decline in discrete professional services revenue. Overall, good revenue growth for the quarter and a bit ahead of our expectations.

Within SabreSonic, we saw strong passengers boarded growth on a consistent carrier basis and benefited from the completion of the SabreSonic implementation at LATAM towards the end of May. Airline Solutions operating income decline was driven by the full flow-through of the $7 million revenue reduction of ASC 606; the impact of Southwest Airlines, which was high-margin revenue; some increased technology expense for the reasons we previously mentioned; and higher depreciation and amortization, all partially offset by the benefits of ongoing cost reductions.

Total passengers boarded on a consistent carrier basis increased 10% in the quarter. The successful SabreSonic implementation at LATAM will add approximately 35 million passengers boarded on an annual basis. Including the impact of Southwest Airlines demigration, passengers boarded declined in the second quarter.

At Hospitality Solutions, revenue increased 10% in the quarter. We had strong Central Reservation Systems transactions, including the completion of Wyndham implementation, which drove teens growth in the SynXis software and service revenue line. This core part of the business, underpinned by our industry-leading Central Reservation System and property management system, drives a reoccurring revenue stream. And Q2 revenue growth was consistent with our expectation coming into the year. This growth was partially offset by a modest decline in lower-margin project-based digital marketed servicing revenue.

Hospitality Solutions operating income was relatively consistent with the year-ago period, impacted by modestly higher headcount-related expense to support business growth, increased technology expenses as our cloud and other initiatives drove a rotation of cost from CapEx to OpEx as well as higher depreciation and amortization.

In Q2, we generated free cash flow of $79 million. Capital expenditures declined $12 million year-over-year, as our increasing scale and efficiency allow the business to become less capital-intensive. As a reminder, the sequential decline in free cash flow from Q1 to Q2 was primarily driven by the timing of our $40 million DXC vendor payment.

Our cash flow supported the continuing strengthening of our balance sheet, and we ended the quarter with a net debt to leverage ratio of 2.8x. In the quarter, we returned $65 million to shareholders, including $38 million through our regular quarter dividend and $26 million through share repurchases.

Our solid first half results and business momentum give us confidence in meeting our full year financial targets, which we increased last quarter. Based on our year-to-date results and run rate, we now expect revenue to come in towards the higher end of our range. Travel Network revenue has started the year with solid momentum. We expect continued share gains. And despite a modest capacity trimming across North American carriers, we continue to see a solid macro bookings environment over the back half of the year. In Q4, we expect pricing growth to moderate as we begin to anniversary some of the factors that have given -- or had driven strong average booking fee growth over the first half of the year.

Airline Solutions revenue has been a bit stronger than expected through the first half, some of which has been driven by a pull-forward of revenue as we signed some renewals sooner than expected. All in, we continue to expect Airline Solutions full year revenue to decline low single digits when you include the full year net negative impact of ASC 606 of approximately $25 million. We expect a more negative impact in Q4 from ASC 606 than in Q3.

Hospitality Solutions revenue growth is expected to continue to accelerate over the back half of the year. Our core business, SynXis software and services, is performing strongly and as expected. Our strategic focus remains on growing this long-term transaction-based piece of the business, and we expect growth from this revenue stream to average in the high teens over the back half of the year. We're being more thoughtful about our digital marketing services versus our original expectations coming into the year. This project-based revenue stream can be resource-intensive and is lower margin, and therefore, has minimal positive impact on operating income. All in, we now expect full year Hospitality Solutions revenue growth in the low teens, a combination of high-teens growth in our core SynXis transactions business and reduced expectations for digital marketing services revenue.

At Sabre overall, we expect other metrics down the P&L to be near the midpoints of our ranges. As we've been pointing out, we're increasingly rotating our total investment dollars from CapEx to OpEx as we accelerate deployment to the cloud and make productive investments and enhancements for stability, security and GDPR compliance. This continuing rotation dampens the flow-through from top line revenue growth to EBITDA and operating income.

We continue to expect capital intensity as a percentage of revenue to decline and now expect to end the year at the bottom end or below our full year CapEx forecast, giving us confidence in our full year free cash flow outlook. As a reminder, Q3 free cash flow will have a tough year-over-year comparison due to the $29 million insurance reimbursement received in the prior year quarter.

At this point, I'd like to welcome Doug Barnett to Sabre. He's the right CFO to help lead the company, and I'm confident his operational rigor and deep technology roots will serve Sabre and our shareholders well over the years to come. I'd also like to thank Sean for his continuous support, challenge and partnership. Together with all my Sabre colleagues around the world, we're accomplishing a lot to serve our customers and our shareholders and to help create the future of business travel.

Doug, over to you.

Thanks, Rick. I appreciate the welcome. I'm incredibly excited to be the CFO of Sabre at this point in our history. As a leader in our industry, we have an incredible opportunity ahead. Sabre's industry leadership, growth opportunities and the impressive executive team across the company are what most attracted me here.

I'm diving right in to quickly get up to speed, and I'm looking forward to working with our investors in the years ahead. I think you'll find that I'm operationally driven, straightforward and transparent. I've a lot of experience in the tech industry, both with traditional perpetual model as well as the subscription-based or SaaS model. I understand and appreciate the value of recurring revenue streams. I'll be working with Sean and the management team to help drive top line growth with a sharp focus on beginning to drive higher flow-through to the bottom line. I'm very cash flow-focused, given my many years of experience with PE ownership. I'm energized by our strategy and the leaders around me. And I look forward to getting out to meet many of you in the near future.

With that, I will turn the call back to Sean for closing remarks. Sean?

Thanks, Doug. I also want to welcome you to the Sabre team. And really, Rick, I want to have a just a thank you for everything you've done with this organization. I really do appreciate it.

We're making measurable progress along the strategy we introduced at Investor Day as we reimagine the business of travel. The second quarter was continued evidence of our progress and execution of our strategy. Our realignment and bolstered technology leadership team is the logical next step in our strategy to accelerate into the opportunity ahead, and I look forward to continuing to share our progress over the quarters to come.

I want to once again thank you for joining us on our call today and would like to go ahead. And operator, please open the call for questions. Thank you.

(Operator Instructions) We'll hear first from John King from Merrill Lynch.

I've got 2 actually. So first one was on the Travel Network business. Obviously, implied revenue per booking, again, pretty strong, I think even stronger in Q2 versus Q1. I wonder if you could just unpack that for us a little bit, whether there are any one-offs in there. I guess, as well maybe the -- some of the private channel negotiations that are going on in Europe may have played a role. And I guess, any thoughts around whether that ends up providing you a headwind if those negotiations continue down the route, maybe more volume starts to go through the private channel. Does that end up potentially providing you a headwind in the medium term? And then the second one was on hospitality. Obviously, good to hear SynXis is doing well. Obviously, Wyndham now fully live. Perhaps it would interest -- be interested in your confidence levels as to how that business can continue to grow strongly -- whether it continues to grow strongly once the Wyndham business has fully lapped. Obviously, being up to a full run rate now, if we look out a year or so, does the pipeline allow you to continue to grow at the same kind of rate you're doing at the moment?

This is Rick. On Travel Network, yes, Q2 bookings fee growth was 7%. So in the quarter, we -- it was primarily supported by the favorable customer pricing mix with specific carriers in Europe, Middle East, Africa, as you noted, a little bit of FX. And we did have some positive mix from our big growth in Asia Pacific, which is overall a higher-value region, even when taking into consideration the size of that region. Remember, though, and we do anniversary IAG in the fourth quarter, right? So that's why I called out that this positive impact on pricing that has primarily been driven by the dynamics around some of the major carriers in Europe would moderate in Q4.

And I'll add to that. Just the one thing that we have also talked about really with the 3 large carriers in Europe is what is happening on a mix basis. And as we talk about -- and I'll go back to Lufthansa. One thing that we watch is the mix, and this is just based on our internal analysis, is that we saw the shift on the indirect to direct in that first year, but again, continue to see pretty much the same level of stability on that mix. And I think we're now going into the third year of the surcharge. The other thing that we watch is just the mix or the share between the 3 GDSs, and it's been very consistent at Lufthansa. We saw somewhat of a shift as it related to indirect to direct on the IAG side. But again, looking at the shift -- or excuse me, looking at the share of the 3 GDSs, it has remained pretty consistent. And as you know, and this has been out in the marketplace, we continue to have conversations with Air France-KLM. There's a few issues that we still feel that we need to work through. But again, as we watch the share as it relates to the 3 GDSs, things have stayed relatively normal. Moving on to your second question, John, which is really hospitality. So Rick walked through and unpacked that a little bit as it related to what we're seeing, specifically on the CRS and the PMS side and strong high-teen growth for the back half of the year. And that business continues to perform well. We get good feedback. And I was actually talking with a group a couple of weeks ago about just the uplift that they're getting in the CRS product on the SynXis side, which is really good. And as we look at that pipeline, and I'm looking at more on the enterprise independent, as I continue to talk with the team, I think that pipeline continues to grow. So I still have high expectations for that. The focus on the digital piece of it, it's something that we have been really watching as it relates to the opportunities that are out there and what is the flow-through to the bottom line. And that's where we've been probably a little more focused on or disciplined on how do we think about it. But when I step back and just look at hospitality in general, it's one that -- I think we'd all like it to move a little bit faster. But again, if I spend time on the enterprise as well as the independent hoteliers, it's clear that there's a lot of discussions that are taking place relative to where do they go with our technology. Our ability to get Wyndham to the other side with the property management system, I mean, this is a large scale, of what's taking place with the world's largest hotelier. And I think it says a lot about the team and what we've been able to get accomplished. And when I look at the advancements that have taken place on the limited service side with what we call version 4 of that, I feel really good about our opportunities as we look into the future.

We'll hear next from Ashish Sabadra with Deutsche Bank.

So a pretty good momentum -- congrats on the quarter. Pretty good momentum across all businesses. My question was more about the Travel Network. You saw some good share gains, even in the quarter, but you highlighted particularly June and third quarter. And looks like it's broad-based, not just Flight Centre. So if you could just talk about what's really driving that share gain and maybe just talk about the product, content and even pricing, particularly incentives, anything to call out on that front.

Yes. Let me just walk through sort of the breakdown, and Rick can add some color to it as well. As we look at -- you're right, it was sort of broad-based in what we've seen as it relates to growth. If I start in the EMEA marketplace, we had some good wins in 2017 and it's just the ramp-up of those conversions that are happening in 2018. And then we've seen some growth on the OTA side. North America, the one thing that we have seen is just strength on the TMC side of the business, the managed travel and the brick-and-mortar. As I think everybody saw, the Expedia results and their volumes were good, and that was a flow-through to us. And then you look at the APAC region is a big driver, as everybody knows, is the continued success of Flight Centre and what's happening there. So again, very broad as it relates to the share growth that we've seen in 3 of the 4 major regions. Latin America, we continue to see just a little bit of sluggishness taking place there. There was a competitive OTA that we decided to walk away from, from that business, and we're seeing the impact of that. But again, when you look at it, the momentum that we were picking up at the back half of the second quarter, we continue to see that roll into what -- so far of what we've seen in the third quarter and feel very comfortable in our position.

Yes, Ashish, it's Rick. And again, we've been looking for the share gain here to come. We've talked about what was going to drive that. We're starting to see that. We see it continuing as we go ahead here, and that's while passing on what we view as some deals that just weren't prudent in OTA market share, particularly in some places in APAC, India specifically, and what Sean pointed out, in Latin America. And so the gain is sustainable. It's profitable. And as I mentioned, the incentive [graph] we see moderating in the second half for the reasons that I mentioned.

Yes. And I wouldn't underestimate, and we talked a lot about the new Sabre Red Workspace and I shared with you some of the stats that are coming out from a very large agency. That's meaningful progress and really does go to why we've been focused on the new Sabre Red Workspace, what the capabilities are in the marketplace. And it gives us a level of confidence as we look at it specifically. As agencies are trying to work through the number of things that I had spoken about, we feel really good and add on to that what we're doing on the hospitality side, Booking.com, what that brings to the table. We spent a little bit of time talking about this, but the new platform that's being done really is a content aggregation of a number of fares and it could be at the same property. And having Booking a part of that really allows us to aggregate and allows agencies to see really all properties that are out there. And we believe that as this rolls out in the back half of the year and then we look into '19, it's a belief that we'll see higher attachment rates. So again, it goes back to the work that we started a year, 1.5 years ago on this, almost 2 years ago and what we continue to do with that platform.

That's very helpful. And maybe just a question on margins. Like -- obviously, pretty good momentum there, and we saw some pretty good growth in EBITDA. But as we think about margins across all the segments, is there opportunity for you to start expanding margins as you -- as some of these investments start to overlap and get into more of a run rate state?

Well, remember, as we talked about, across '17 and '18, what we were investing for and we ramped up investments in certain things to improve stability, security. We've had GDPR to deal with, with others as well. We've gotten past and through a lot of that lift. And as you can see, we're continuing that rotation of total investment, technology investment more towards OpEx, but we're more than fully offsetting that on the CapEx. So really more focused during this period of how that drives our cash flow. And we're seeing a little bit of the pressure on margins that we predicted, so nothing new there. Then what you look for is, again, as you go to the contemporary architecture and get the benefits of that, and we've done great renewal and improvement on our Airline Solutions products. Sean talked about that again in terms of controlling the versions, improving the product, customer satisfaction up. I think that's where you're going to see benefit there and start to have opportunity and traction again to improve the margin picture. But that's similar to what we've already talked about in our medium-term guidance there.

And from Goldman Sachs, we'll move to Jim Schneider.

So welcome, Doug, and congratulations, Rick, on a great tenure. I guess, maybe just to kind of start off on -- following up on the margin side. If you look at Travel Network margins and where those are likely to normalize, there's a couple of competing factors, it seems, in terms of lower incentives in the back half of the year, but also some headwinds so with the higher OpEx and lower CapEx kind of trade. So where do you think those Travel Network margins can kind of trend directionally as we head into 2019?

Well, again, seeing the moderation in the incentives. And as I said in -- pointing out into 2019, we're seeing -- getting returning closer to the normal pattern, where you have low single-digits incentive growth. You have low single digits rate growth, you can be a little ahead or behind on either side of that in any given quarters there. So again, we're starting to see -- have some ability to see that come into play. Again, that's consistent with what we had talked about previously in the medium term. But I know there have been a bit of concern with the industry incentive growth this year. We've played it, I think, very well. And we're absolutely seeing that moderate materially in the back half of this year and then getting back to a bit more normal pattern.

I think the other thing, and this gets back to what we talked about. As we look at continuing to grow business, we know that there might be some margin compression there. We're seeing that as it relates to what is being layered on right now. But we get to a level of normalization, as Rick talked about, in 2019. As we look at the OpEx-CapEx mix, we believe you have to continue to look at that over a longer period of time. The other thing that we continue to focus on is the free cash flow. And part of what we've been able to do, and this was what allowed us to feel comfortable in raising guidance coming out of the first quarter, is managing it. And I think we -- you got to continue to look at all 3 components of that and what's taking place. The share growth is coming from what I consider to be really good customers, much of it brick-and-mortar, that we think is really good foundation for us moving forward.

Helpful color. And then maybe as a follow-up. In terms of the Hospitality Solutions segment, good to see that Wyndham is now fully onboard. And I understand the acceleration in the back half of the year. Where do you think, given your current customer set, hospitality kind of segment growth kind of normalizes to on a revenue basis once the impact of all those brand additions is now baked into the numbers?

Yes, Jim. And again, pointing out in the second half, we grew revenue this quarter a little over 10%. So we see teens, high teens in the core SynXis products, the central reservations, the property management. And that's including given that we've already now completed the Wyndham, CRS migration and we're well along the line in the smaller property management. So very good growth there. And again, that's driven primarily off of our reoccurring transaction-based business across independent hoteliers. And then it will add on top of that when other enterprise comes along.

So just to clarify, the pullback from the digital solutions business over that kind of OpEx-intensive work is kind of in the mid-single digits contribution range?

Yes. It -- so that's -- it hurts us a bit on the revenue expectations versus coming into the year. But it really doesn't have any -- no impact. We managed that completely to offset that and more at the operating income line.

We'll go now to Brian Essex with Morgan Stanley.

I was wondering if we could just dig in a little bit to Booking.com. As you put their content on your site, what the key demand drivers you see as you pursue initiatives to drive more content to your site? And how that works out in terms of economics and leveraging that data on your platform?

Yes. So one of the big things that we've seen, and this gets into attachment rates, more specifically on the brick-and-mortar agencies, is that because of the number of negotiated rates that are out there with specific hoteliers. You may have one property that has a number of different rates that they've negotiated. And it's getting that essentially holistic view of all that content that is out there and being able to push that through. So when we look at it, it's the ability for agencies to have that content in front of them and be able to sell all those transactions. So the ability of getting more and more content, be it from hotel aggregators or other negotiated rates that are out there, are extremely important. And that's what this allows us to do. You then go back to just to the normal model as it relates to -- what we get as it relates to the rate associated with selling and then there's the flow-through on the incentive. But as we've talked about in the past, when we look at the hospitality sector, we have higher margins there than our core business or -- if I look at the airline side. So anything and everything that we can do to make sure -- and this gets back to the seamless nature that we're trying to drive for the agencies that they can book all components of travel. That's a big driver around this, and that's what the platform was set up to do.

And how does that work out for Booking in terms of the economics that they realize on some of those transactions, maybe on hotel commissions that are relatively higher relative to airline? And as they view their business model, what kind of an impact -- how do they view the benefit to their platform of driving content to your platform?

Yes. We don't get into the economics of those deals.

A question for them, Jim. It's good for us. A question for them, I don't think they'd do it if it wasn't good for them, but that's not for us to answer.

Yes, I guess, I was looking more for the high level, how they think about it, with that point in mind exactly there.

We'll go now to Jed Kelly with Oppenheimer.

And I guess, we'll stay on the Booking.com narrative. Do you see yourself getting more involved with more alternative accommodation inventories? I mean, there are 2 other larger platforms that specialize in large vacation rentals and alternative accommodations. And do your competitors have a similar agreement with Booking.com?

Of the competitors, I do not believe they have agreements that are out there. As we look at it related to other sources of content, and it really does get into that aggregation, yes. I mean, that's the focus is how do we pull more and more content and be able to push it through to the agency community, because they're looking for it, they're actually booking it, in many cases, but they're looking for a very efficient way of doing it. And that's what we have built really with Sabre Red Workspace and then the hotel platform that attaches to that.

As you think about it from a corporate side, more and more of the data showing that corporates, and again, that's the travel agencies that we serve through GDS, are using more alternatives, whether it's bookings, whether it's HomeAway, whether it's Airbnb. Obviously, we have that in mind when we look at the lodging, ground and sea platform and being able to bring that to the agencies through the Sabre Red Workstation (sic) [Workspace]. And we think we're ahead of the game and others in that regard.

So with this agreement with Booking, you expect most of the accommodation to be business travel-related versus leisure?

Yes. I mean, that's what -- if you look at it, most of what the TMCs and brick-and-mortar are selling are more business related on the hotel side of the equation. So yes.

Okay. And then just on your capital expenditure guidance, I know you gave a little more color where you think it's going to come in at the lower end. But even at the low end, it does imply a nice sequential step-up from the first half. Where is that coming from? And is that the base we should start to focus on as we model out to 2019?

Well, again, Jed, as I said, expect it to be at or below our guide for the year. And so over the long term, again, we continue to expect less capital intensity. We're going through this period of a lot of rotation from CapEx to OpEx. But as we look further out, our overall total technology spend, the combination of those, is moderating. We've turned the corner on that and reducing the overall capital intensity here. And we'll continue to go rapidly to the cloud and see those benefits that we've outlined before in the medium-term guidance there. So again, all of that helps us to be both quicker in the marketplace with our solutions. That's what you're doing it for, first and foremost, to make sure that they're secure, they're stable. And then get the benefits to the cash generation line.

And from Bernstein Research, we'll go to Mark Moerdler.

I want to drill in a little bit more on the cloud transition. First off, can you give a bit more color -- thinking longer term, can you give a bit more color on how you think about how much of CapEx could theoretically shift over to OpEx over a longer period of time? Is there going to be a stability point or is this just going to be a flow? And then I got a follow-up question.

Yes. It -- this is going to be continuous. And I think, Mark, on our cloud migration, we're moving at pace and ahead of even expectations from a year, 18 months ago with our footprint. We've announced strategic multiyear agreements with both AWS and Microsoft Azure. We have the ability to work with other leading player like Google as well. And I think what you're seeing, importantly, is something that we articulated back at the Investor Day is this is a combination of moving to the public cloud, but also a hybrid structure. We're getting some of the advantages of what you can get from AWS, from Microsoft, from Google and bringing it into those data centers that we're still running, are holding on new data centers that are state-of-the-art here in North Texas, where we moved our shopping complex, one; and even some of the other ones, but we are scheduled to shut them down. In the meantime, we can bring some of the benefits of the tools that you get from those providers that sit above the pure compute infrastructure level. You're reading a lot about that more and more. We were on to that. We're taking advantage of that. And so that's what's going to accelerate our overall move. I laid out kind of the target to rotations of our total technology spend of how we can move less and less of that into maintenance and operations and from the pure kind of compute, serve and networking side. And that's one of the big drivers of dropping that 5-plus points over the next few years in terms of that spend. So nothing to update there for the medium-term guide. But I don't think that's the end state either. When we went out across the medium term, we looked a little bit further out where we gave some estimates that we drive that down even significantly more.

Then changing gears, a follow-up. Can you give a bit more color on the drivers of the digital marketing pullback? Is this a demand pullback due to issues on -- in the marketing space? Or is this something that was driven more by your determination?

Yes. If you look at it, we -- digital marketing is important to us, because -- let me walk through sort of how we thought about this. When we look at the digital marketing product and we look at some of the larger hoteliers out there, it gives us really good insight on where they're going and where they're wanting to drive their business, which leads into the conversations more on the CR as well as the PMS side of the equation. But what we do find, a lot of that is custom development work. And we want to be very balanced relative to the strategic part of what we're doing with what we consider to be key customers and looking at the entire portfolio versus doing really custom development related to, DX, which is their website. And that's what we've been focused on, Mark, because it really does get back to -- that it is custom dev, and there is man hours labor behind that and are we getting the right margin that we want out of the business. So that is the area that we focused on and understanding the critical customers that get into more strategic relationships, because we do think that there's a lot of insight that you gain, but we also want to be thoughtful that we just don't want to go off and do one-offs that we don't see long-term strategic relationships there.

I think -- this is Rick. Going forward on hospitality more and more, it's bringing -- we've got tools to help with real-time data analytics, business insight that fit into our SynXis portfolio. And that's an area where, again, we think that there's going to be increasing value-add. It's also related to some of the talent and the structure that we brought on that Sean was talking about that Sundar will bring in terms of having to take advantage of this very rich data set that we see across the traveler's journey and bringing that into the hospitality space. That, to me, is much more important than kind of low-margin digital marketing services that they can get from us or they can get from other people in the marketplace. But it's highly -- we're really bullish on our lead in central reservations, property management, contemporary architecture of those and then how do you bring that rich data analytics insight there. That's the next leg.

We'll hear now from Neil Steer with Redburn.

Just 2 quick questions. Firstly, on the -- with regards to comments about market share improvements in Travel Network, are those comments specifically relating to the expected share improvements or share gains over the next 2 to 4 quarters based upon the book of business you've got at the moment? Or is that a comment that extrapolates further into the future? And if so, would you care to sort of highlight regions where you believe that those share gains can continue?

Yes. I mean, in unpacking that, as we walked through it and we looked at the share gains and what had taken place and we broke it down by the regions, if I look at it, it's the momentum that we see going into the quarter, into the third quarter. When you look beyond that, and this right -- I go back and I talk about just the strength of the products and what we're seeing in the marketplace is that a large focus of what we've been doing is more on the corporate travel side, the TMCs. And we still have to stay very focused on the OTAs and the OTA growth. And in doing that, making sure that when we look at our business, we feel it's sustainable into the future. So you have to be very balanced in your comments relative to share well into the future because I think we all know this business. But again, based on the foundation of what we've been able to do and the momentum that we've built over the past couple of quarters, I feel good as it relates to where we are and then moving into the remainder of this year.

Okay. And longer term regionally, is there a particular area where you feel those gains may come through?

I mean, we talk about the area of focus as it relates to the European marketplace. And we've seen really over the last, I would call it, 5 years about 5 to 6 points of gain. The acquisition -- or excuse me, the deal with Flight Centre in APAC was something that was significant. But again, I think when you look at it, we remain very strong in the North American and Latin American marketplace. But we do see the European marketplace as the opportunity to continue to grow.

Okay. And the other question relates to the commentary about the guidance. And obviously, you're highlighting that you expect to be at the upper end of the revenue guidance target for this year, but at the midpoint for the other metrics, so it was the EBITDA and the adjusted EBIT. To what extent should we take those comments in conjunction with the revised CapEx target for this year? And I'm really thinking about how the operational leverage of the business changes as we go from 2018 into 2019 and whether there is operational leverage that we will see at the adjusted operating profit level or whether that won't be seen because of the rise in OpEx next year.

Yes, Neil, it's Rick. I think for 2018, tried to laid it out very clearly. I think we raise on the revenue. We hold the middle stripe on the earnings through the EPS and CapEx at the bottom or below really translates to strong confidence in accelerating this free cash flow. But I know there was some doubts coming into the year on that and sets us up very well for 2019 in that regard. And again, there's a heavier, faster shift to OpEx from CapEx this year, that's impacted the margins. But again, we're through some of those big lifts. So yes, it feels good for the full year. We raised in Q1. We're able to reiterate that -- move to the top end of revenue here and be at or below on capital expenditures. So I think revenue and free cash flow are the things focused most on. You hear Doug say the same thing. And then you get the operating leverage in the middle there as we continue to scale. We innovate and we're seeing the good market share gains in Travel Network that Sean talked about. We like how the health of Hospitality Solutions is starting to reignite the growth engine there. And we're just the definitive leader in Hospitality Solutions for central reservations, property management on a contemporary architecture stack, cloud-deployed, 2.5x our closest competitor in central reservations. So I think scale is going to continue to benefit over the medium term and get operating benefit there.

We'll hear now from David Togut with Evercore ISI.

Rick and Doug, I'd like to ask about NDC. Sean, you really pivoted Sabre toward a strong embrace of NDC. I'm just curious what the revenue model looks like for Sabre in the industry as you help the airlines market their high-margin ancillary services.

Yes. David, as it relates to NDC, a lot of the discussions that we have right now are: one, on the technology components and it does to get into what is that model associated with driving revenue into the future. And I think you have to look at it 2 components. One is the ability to sell more types of products and services through the GDS, inherently allows more transactions to take place. And we believe that's an important piece of it. So it's that base model that we currently have and how do you essentially have more bookings that go through. The other piece of it, which is the one that I think everybody is still working through is that when you get into components of NDC and talk about ancillaries, what does that model transition to relative to what do we receive potentially from an airline or even into the hospitality side and what is that incentive passed through to agencies? And that's the piece of the business that is continuing to evolve. And there's discussions that are out there. And we've entered into a few agreements that have uplifts associated with that. But again, I think that's the one that needs to mature more, and that's going to take a little time for that to happen. So it's those 2 pieces that we continue to look at the business and how that will factor into revenue and bottom line growth into the future.

On the ancillary piece, is that a model that will be developed in 2019? Or would you expect it to be more 2020 time frame?

In fairness, I think it's going to be more on the airlines and their adoption of what takes place. And that's what we're finding is that in many cases, there are things that we would like to do from a technology perspective to help enhance them. And then it goes back to their capabilities of actually doing it within their own technology stacks in some cases. And again, this goes back to not just us, but our competitors on the PSS side and what they're capable of doing. The one thing that we have definitely seen over the last 6 to 9 months is engagement with carriers that operate on all PSS systems and how they think about it. And our embracement of NDC and thinking about retailing, distribution and fulfillment has clearly allowed us to have a seat at the table and show our capabilities to customers around the world that may not be using our products.

Understood. Just a quick final question. [Sabre] had a lead in the Hospitality Solutions business, but Amadeus is rolling out their guest reservation system platform with InterContinental Hotel Group really late this year, early next year, at least the onboarding of the business they've signed. When you compare your technology to theirs, I mean, what does the comparison look like and what -- how are you preparing for an increased competitive environment for Hospitality Solutions?

David, this is Rick. I'll start. I mean, we -- they started from a rebuild of Holidex system, and it's apparently taken a number of years and longer. So we chose not to go that route and built more from a small platform and ground up. We like our decision on that. We think that's allowed us to get out in front there. We're the ones that have proved that, that it works at scale, and we proved it at the enterprise side. So we like our hand, and we're going to continue to push on that. We know they're coming to market.

And we compete with other providers today. And they're another competitor and they have a strategy. And we'll continue to compete vigorously in the marketplace to win business.

And from Cowen, we'll move to Matthew Broome.

So your lodging, ground and sea bookings (inaudible) in the quarter. Is that primarily due to TMC strength? Or was there anything else driving that?

The strength that we saw was actually the ramp-up on Flight Centre was the big driver of what we saw on what we consider to be the non-air component of it. So again, it goes back to that conversion, the strength that we see. That was the primary driver.

Okay, great. And how much early interest has there been from customers in the Intelligence Exchange marketplace? And what kind of adoption do you expect over the remainder of the year?

Intelligence Exchange is a product that we've had out there for some time, industry-leading, unique to the industry, and it's been one of our top products. What we're doing is just bringing that more and more into the whole platform and looking at then our next level of the SabreSonic platform that will come later this year, and it just drives off of Intelligence Exchange. Remember, Intelligence Exchange is a system that takes information from different databases that we're running or the airline's running. It [can set chop] systems in an airline, whether it runs the SabreSonic reservation system or competing systems and allow real-time decision-making with people operating the airline. And again, it's just part of our vision on a truly connected airline and how we're going to service that.

As we talk about the increase in just share of wallet with a number of airlines, Intelligence Exchange is one of those pieces that a number of airlines are taking.

We'll hear now from Adam Hackel with Imperial Capital.

Just one question from me. I appreciate the color on capacity as we get toward the back end of the year and some of the trims that we've been seeing, especially in North America. Just wondering about -- how we should think about the Travel Network in 2019 if that trend sort of continues and sort of flows through. We had Alaska come out and say they're going to be growing only 2% in '19, and that's typically more of a growth carrier. So just wondering how we should think about that for next year.

Yes. Hey, Adam, this is Rick. I mean, there's plenty of capacity in the business to fuel our model, and that's the benefit of it. I think airlines are just doing a good job of -- in the North America market of managing their load factors. They did slight trims. I mean, most of them are talking about 50 basis points, maybe 100 basis points total, trimming towards the back end. That leaves their whole year of growth largely where they were estimating a little bit towards the lower end. So that's what we see for the rest of the year. It's very supportive. We see a strong macro going forward.

Sean, from observations, you've done a lot more capacity.

I mean, we're sort of in this cycle right now that we've seen fuel prices inch up a little bit. And as airlines -- and it's just not North American Airlines, airlines around the world will continue to look at their capacity associated with the demand that's out there, understanding higher fuel prices. But it's a normal cycle that we have seen in this business for a number of years. And as Rick stated, the one thing that I like about our model, it's resilient and selling tickets that are out there as we continue to focus on the balance of the equation that we bring to our customers. But again, we've seen some slight trimming related to the North American carriers. What that leads into 2019, we will have to wait and see. And like I said, fuel will be a big impact on sort of the direction of capacity.

This is a quick follow-up. Just curious how you guys think about fuel prices. Sean, you just mentioned that. Is there a price you guys have in mind where you guys sort of expect to see a real material takedown in capacity? Or is it more just sort of play it by ear, I guess?

Well, I mean, we listen to the commentary like you listen to the commentary from the airlines. And again, like historically, we look at it relative to the focus that they have on managing that supply and demand, related to what they can get as it relates to yield, and in doing that, for us to have a specific target out there on fuel. We do know that as fuel goes up, it puts more pressure on airlines. And again, we monitor it very closely.

We do have time for one more question. That will be from Brad Erickson from KeyBanc Capital Markets.

Just had a follow-up, just really into the Latin America. Can you bit give a bit more color on the OTA you walked away from? Sounds like it was big enough to warrant the comment. Can you just maybe talk about what drove that? I can't ever recall you talking about situation like that before. And then secondarily, was the sluggishness you called out in that region largely related to that relationship going away? Or was it as much a function of just weaker volumes, given some of the...

Brad, in my comments, what I was referring to was general Latin America economic weakness. And we had seen a bit of a return to growth, and that turned a bit in the second quarter. There's -- I'm not calling out anything that's not obvious there. In terms of OTAs, now we aren't going to comment on that. We've commented in the past about certain deals that we've chosen to walk away from when we didn't see the risk return. We talked about that. I talked about it in a couple of deals in APAC. So there's nothing outsized about that by any means.

No. And it goes back, as Rick just stated -- yes, I mean, it's the discipline that we see in the marketplace. We talked about walking away from specific OTA opportunities in the India marketplace. And we saw one in Latin America that just did not make sense from an economic perspective.

To be clear, it was a new opportunity or an existing one? Like it was already business in hand?

Not going there.

And with that, I'd like to turn the call back to Mr. Menke for any closing remarks.

Great. I want to once again thank all the Sabre employees on what they've been able to accomplish as we continue to move this organization forward. And I want to thank everybody for joining us on the call today and look forward to talking to you in weeks and months to come. Thank you.

Again, that does conclude today's conference. Thank you all for joining us.