Sabre Corporation
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Good morning, and welcome to the Sabre Second Quarter 2014 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 expressed written consent of Company is strictly prohibited. I’ll now turn the call over to the Vice President of Investor Relations, Mr. Barry Sievert. Go ahead, sir.

[Barry Sievert:]

Thank you, Karen, and good morning, everyone. Thanks for joining us on our second quarter earnings conference call. This morning we issued an earnings release, which is available on our website at investors.sabre.com. A slide presentation which accompanies today’s prepared remarks is also available during this call on the Sabre website. A replay of today’s call along with the slide presentation will be available on our website beginning this afternoon. Following today’s call we invite equity and debt investors with additional questions to follow-up with Investor Relations. Throughout today’s call the revenue, earnings per share, EBITDA, gross profit, capital expenditures and free cash flow information as well as other financial information that will be provided are from continuing operations and have been adjusted to exclude expenses and other gains or losses related to reorganizations, amortization of the Expedia SMA incentive payments, the working capital impact of the Travelocity business model change, litigation and tax matters and certain other items. The most directly comparable GAAP measures and reconciliations are available in the earnings release posted on our website at investors.sabre.com. We would like to advise you that our comments contain forward-looking statements. These statements include, among others, disclosure of our outlook including revenue, adjusted EBITDA, net income and earnings guidance, our expected segment results, our expectations of industry trends and various other forward-looking statements regarding our business. These statements involve risks and uncertainties that may cause actual results to different materially from the statements made on today’s conference call. Information concerning the risks and uncertainties that could affect our financial results is contained in our SEC filings including the final prospectus filed on April 17, 2014 relating to the Company’s initial public offering and our Form 10-Q for the quarter ended June 30, 2014, which we plan to file later this afternoon, as well as in today’s earning release. Participating with me on the call today are Tom Klein, our President and Chief Executive Officer; Rick Simonson, our Chief Financial Officer; and Chris Nester, our Treasurer and SVP of Finance. Tom will start us off with a review of our second quarter performance. Rick will then offer some additional perspective on our financial results and forward outlook before turning the call back to Tom for closing remarks. We will then open the call to your questions. With that, I’ll turn the call over to Tom.

[Tom Klein:]

Good morning everyone and thank you for joining us for our second quarter call. We’re committed to leading the technology transformation for the travel industry. Overall, the results for the quarter demonstrate solid execution towards that important objective. We’re getting good traction from investments and innovation like new data-driven solutions mobile and our new hospitality sector initiatives. We’ve also built very solid pipeline of implementation across the businesses and see strong demand for our products in all the sectors we serve. All this creates momentum to fuel future top line growth and we’re pleased with the sales wins we had this quarter. Financial results for the quarter came in directionally as expected. Revenue growth across our core businesses moderated from first quarter growth rates while margins expanded. Total company adjusted revenue was $720 million, a 6% decline while adjusted EBITDA increased 7% to $204 million. Excluding Travelocity revenue increased 4% to $637 million, driven by a 5% increase in Airline and Hospitality Solutions revenue and a 1% increase in Travel Network. We delivered strong earnings growth across our core businesses. Adjusted EBIDTA increased 31% within the Solutions business and 17% for Sabre excluding Travelocity overall. And while the second quarter was a bit better than expected on the earnings front we’re very focused on achieving better revenue growth, which we expect to do in the second half of the year. Looking more closely Airline and Hospitality Solutions businesses, as expected, this was a moderate growth quarter with revenue growth of 5%. As I mentioned upfront, we’re seeing strong flow-through from our SaaS software model, which produced very strong adjusted EBITDA growth of 31%. In addition to the expected top line growth, driven primarily by the organic growth of our customer base we had several exciting new wins in the quarter. The diversity of the wins we had demonstrates the strength of our broad software portfolio and our ability to sell into airlines of all types and all sizes. For example, in our AirCentre suite, which is our operation solutions Spirit Airlines selected Flight Plan Manager. Spirit will use Flight Plan Manager to optimize flight plans based on multiple variables such as fuel cost, fuel burn, speed, weather and emissions. Data and workflow integrations coupled with advanced visualization tools, expedited planning and the modification, the authorization and distribution of flight plans. So we welcome Spirit to the AirCentre family. Within our AirVision suite of Commercial Solutions, United Airlines chose our In-flight Catering solution for use across the combined United and Continental fleets. This solution will provide United with the ability to reduce catering costs, plan menus, do onboard provisioning and match meals to customer preferences. And the Swiss regional carrier and current SabreSonic CSS customer, Darwin Airlines, will become the most recent example of an airline that’s expanded their Sabre footprint to include solutions from our full portfolio of commercial and operational solutions. At Hospitality Solutions, we welcome the Morgan Hotel Group, the super chic hotels like The Delano and The Hudson, as the latest users of the SynXis Central Reservation System. Morgans will also utilize our Guest Connect booking engine for the website and our Voice Service agent application to help drive growth in direct bookings. We plan to accelerate investments in our Hospitality Solutions business in the back half of the year as we see increased opportunities for both new product innovation and specific segment growth. As an example, we’ve just done a major release of our SaaS property management system that’s coming out of a very successful data and will be expanded to additional hotels by each of the data participants. This is one of several things that give us confidence to add additional sales people to our Hospitality business. Turning to Sabre Travel Network, direct bookings were up slightly in the quarter. With solid growth in EMEA offset by second quarter timing of Easter and the steep decline of air travel in Venezuela. The modest volume increase resulted in a 1% increase in revenue in the quarter. Bookings growth increased we exited the second quarter and it’s remained strong through July, which bodes well for the summer season. Continued solid expense management resulted in a 5% growth in segment adjusted EBITDA. We’re seeing solid sales growth in corporate market, including GetThere, our corporate booking tool, and the recently launched TripCase Corporate, as well as a suite of other corporate products. In the second quarter, we signed a large GetThere agreement with a Fortune 20 Company to become their booking tool of choice in over 25 countries. This win adds to our strong list of large global corporations deploying GetThere. And we launched TripCase Corporate, our TripCase solution for managed corporate travel during the second quarter, signing our first large customers to multi-year agreements. Our continued success in the large corporate segment is a testament to the significant differentiation of our product, which is highly valid by the most sophisticated multinational corporations. We continue to expand the diversity of products available in our marketplace. During the quarter, we renewed agreements with Scandinavian Airways and Lufthansa. We also renewed and expanded our agreements with the IAG family of carriers including British Airways and Iberia to include ancillary product sales. Also, as part of that agreement, IAG carrier Welling, the large Spain based low-cost carrier, will enter the Travel Network marketplace for the first time. We launched United’s Economy Plus seating and we’re the first to fully integrate the offering into the agent workflow from shopping through seat reservation. In total, we launched ancillary sales for eight airlines in the second quarter and now have launched ancillary sales for 20 airlines year-to-date. And we significantly increased our hotel content in the marketplace with the addition of the Expedia Affiliate Network hotels, which brings approximately 55,000 incremental new properties into Sabre Travel Network when implemented later this year. Let me turn to Travelocity. The North American business is reaping the expected benefits of the Expedia’s content and technology platform. We can now fully focus on exploiting the brand strength at Travelocity, eliminating the remaining legacy costs and working with Expedia to maximize the sales and profit pool generated by the Travelocity brand. To that point, in the second quarter, as we work to fully understand the impact of the new model on Travelocity, we decided to throttle marketing expense somewhat. With the implementation complete and good metrics on the effectiveness of incremental marketing spend we’re ramping additional spending in the back half of the year to drive profitable growth. Even in this period of learning and implementing a new model we saw exceptionally strong growth particularly in hotel bookings year-over-year. As expected and planned, total Travelocity adjusted revenue declined, reflecting the new revenue share model. Total adjusted revenue was $84 million, a decline of 46% from prior year. Combined with the 63% decline in adjusted cost of revenue and a 19% decline in adjusted SG&A, we narrowed the adjusted EBITDA loss to $9 million in the second quarter. With the transition largely complete, we expect stronger business performance and increase in profitability going forward resulting in solidly positive full year adjusted EBITDA for the business. And while we focused on delivering business results today, we also continue to increase the innovation lead that will ensure our continued success going forward. We’re delivering innovation to our customers at a pace that’s second to no one. We’re most focused on innovations that leverage data and mobile in new and unique ways to enable travel suppliers and agency customers to significantly improve both their business performance and their customers’ experiences. We’re taking advantage of technology trends to deliver real and differentiated capabilities. I’m going to walk through a couple of examples. Through our reservation systems for airlines and hotels and through Sabre Travel Networks’ GDS, we’re providing airlines and hotels the capability to unbundle their products enabling the up-selling of ancillary products to drive increased revenue and greater personalization. Car rental companies can do the same through the Sabre GDS. We’ve uniquely, deeply embedded these capabilities into the travel agency workflow to ensure maximum sales effectiveness. On the Direct Distribution side, we provide airlines and hotels with intelligent solutions to allow them to target specific offers. And in Hospitality, we’ve developed business intelligence products that allow our customers to improve revenue optimization by providing increased insight into competitive set booking activity and market trends. In Airline Solutions, PRISM is used by more than half of the top 50 airlines worldwide to optimize airline contract negotiation and to measure contract effectiveness. This sophisticated business intelligence product and its underlying patented process is unique and airlines around the world continue to adopt it. This quarter we had contract renewals at British Airways, Qantas, Aeromexico, Latam, South African Airways and we welcome JetBlue as a new PRISM customer. We’ve also been focused on driving innovation in an open environment that welcomes new ideas and capabilities from developers, from start ups and from customers around the world. The Sabre Red App Centre and Sabre Dev Studios, which we recently launched, are both industry firsts. The Sabre Red App Centre is a repository for apps that can be easily downloaded into the Sabre Red workspace used by travel agents globally. In fact, we’ve seen downloads in 112 countries around the world. And our recently launched Sabre Dev Studios provides a software development kit and robust APIs that enable developers and start ups to take advantage of Sabre services and advance innovation in industry. These type of initiatives are overdo in the travel industry and we fully embrace expanding the ecosystem innovation across the globe for our customers. And our focus on innovation is particularly apparent in mobile. We’re responding to a mobile centric world. Our cloud-based Sabre Red Mobile desktop is the only available mobile app for agents. The app includes a custom-built keyboard for maximum efficiency. It also enables our agents to move seamlessly between mobile and desktop environments without disrupting the work flow. That’s a difficult best practice for multi-screen apps. TripCase is the premier travel management itinerary solution for corporate and for consumers. This quarter we launched TripCase Corporate and several large enterprises have signed on including Cerner and General Electric. TripCase seamlessly links all the travelers’ reservations and delivers free real-time flight alerts and features like airport mapping and alternative flight information when you need them. Last year in 2013, TripCase ambled about 13 million trips. This year we now expect over 25 million trips to be managed and we fully expect those growth rates to continue into 2015. Our online travel brands are also focused on mobile. Lastminute.com saw a 200% increase in mobile hotel bookings in the second quarter. Lastminute.com is uniquely positioned to capture mobile traffic as our top secret hotel product has some of the best laid booking content available anywhere in the world. And at Sabre Airline Solutions we’ve significantly reduced pilot load with the introduction of our electronic flight bag solution e-Flight Manager. Industry estimates are that over $100,000 per aircraft, per year can be saved and reduced weight on-board when e-Flight Manager is used to replace paper documents. The mobile connectivity drives pilot convenience and the ability to dynamically manage flight information adds benefits. Looking ahead, I’m confident that we’ll greater business benefit from our mobile and data investments and we’ll continue to invest while delivering solid financial performance across our business. With that, I’ll turn the call over to Rick to walk through the financials and the full year guidance.

[Rick Simonson:]

Thanks, Tom. Strong Q2 adjusted EBITDA growth was a result of solid volume growth across our solutions customer base and strong earnings flow-through across the core businesses. Given the changes in the Travelocity business model, I think it is most insightful to focus on the results of our two growing core businesses, Travel Network and Solutions. We refer to these as Sabre excluding Travelocity. On this basis revenue was $637 million, an increase of 4% year-on-year. Q2 adjusted gross profit totaled $280 million, a 5% improvement from the same period in 2013. And total adjusted EBITDA increased 17% to $213 million. This demonstrates the solid flow-through of our business model. Sabre consolidated adjusted earnings per share totaled $0.22 for the quarter. Moving to the balance sheet and resulting cash flow for the quarter. From Sabre consolidated adjusted EBITDA of $204 million we generated $63 million of adjusted free cash flow, a 9% increase compared to the year-ago period. Adjusted free cash flow excludes the impact of Travelocity working capital unwind and other costs related to the restructuring as well as some litigation and other costs. Cash flow has been running ahead of our projections year-to-date, providing us with the flexibility in early August to proactively repurchase $50 million of non-cash credits from American Airlines that related to the prior 2012 legal settlement. While this will dampen cash flow performance over the balance of the year, but it will result in a closer relationship between adjusted EBITDA and operating cash flow in future periods. We just believe this clean up makes good sense as we communicate our results going forward. Total adjusted CapEx in Q2 was $69 million. First half adjusted CapEx spending of $128 million is below our expected run rate. We anticipate the pace of spending to increase over the back half of the year. Total net debt declined from $3.4 billion on March 31 to $2.855 billion as of June 30. This was reflecting our significant debt reduction, driven by the IPO proceeds and is resulting in a net debt to trailing 12 months adjusted EBITDA ratio of 3.6 times. This puts us near the top end of our medium-term targeted range of 3 to 3.5 times net debt to adjusted EBITDA. At the end of the second quarter, our debt was 55% fixed after including $750 million of interest rate swaps. However, we believe we’re effectively 100% fixed over the next 12 months due to the 100 basis point LIBOR floor included in our floating rate debt and when considering that the current one-month LIBOR rate is below 20 basis points and expectations that it will remain below our floor for most of 2015. We are evaluating layering in forward starting swaps in the months to come for incremental rate protection past that point. With two quarters of solid performance behind us we are reiterating our full year guidance for adjusted revenue. We are increasing our guidance for adjusted EBITDA, reflecting strength across the core businesses. We’re also increasing our guidance for adjusted net income and adjusted EPS. In total, Sabre excluding Travelocity revenue, is expected to be between $2.575 billion and $2.595 billion, including eliminations of approximately $30 million to $35 million. Full year adjusted EBITDA is expected to be within a range of $833 million to $843 million, an increase of between 8.5% and 10% year-over-year even as we step up growth investments in the back half. Including Travelocity, we expect total adjusted revenue of right around $3 billion. And we now expect adjusted EBITDA to be between $848 million and $863 million. We are also increasing our guidance for net income and EPS. Net income is now expected to be in the range of $222 million to $237 million, compared to our previous guidance for $215 million to $230 million. The increase in net income is a function of a couple of things. The increased expectations for EBITDA, that I just mentioned and lower D&A related to less than anticipated CapEx spending in the first half of 2014. These items combined with a lower dilution share count that originally contemplated led to an increase in our expectations for adjusted earnings per share from our prior range of $0.86 to $0.92 to now between $0.90 and $0.96. As a reminder, by business units, business drives for our full year guidance billed as follows. In Travel Network, for 2014, we continue to expect full year bookings growth of 2.5% to 3%. Revenue growth will be somewhat dampened by Venezuela and the slightly lower average pricing due the merger of American Airlines and U.S. Airways. Incorporating these and factoring in modestly improved recent booking trends this summer, revenue growth is expected to be towards the higher end of our previously discussed 1.5% to 2% guidance range. In Airline and Hospitality Solutions, we continue to expect 2014 revenue growth to be between 7% and 9%, driven by solid growth across our customer base and incremental sales across our broad portfolio. We continue to expect full year passengers boarded in Airline Solutions to increase approximately 4% to 5%. The transition of Travelocity North America to the Expedia platform has gone smoothly and the business is performing well on the new platform. As a result, we expect significantly improved results in the back half of the year compared to the first half and continued momentum looking ahead to 2015. I’ll turn it back to Tom now.

[Tom Klein:]

Thanks, Rick. In total, the second quarter continued to demonstrate our leadership in developing and delivering critical technology that underpins the $7 trillion travel ecosystem. Our installed base of leading Airline and Hospitality customers drove solid top line growth across our Solutions business even as drove additional new sales and continue to invest in creating innovation for tomorrow. We continue to expand the value of the Sabre Travel Network through the addition of new content and solutions positioning the business for stronger growth going forward. And Travelocity operating the new model transitions behind us and we expect improving business results from here going forward. We continue to carry significant momentum with leading solutions, a terrifically diverse customer base and the creativity and determination to continue to push the envelope on what’s possible on the travel space. With that, we’d like to ask the operator to open the call for questions. Operator?

[Operator:]

Thank you. (Operator Instructions) Our first question comes from the line of Heather Bellamy from Goldman Sachs.

[Heather Bellamy:]

Great. Thank you. I had a couple of questions and thanks for taking up in advance. I wanted to talk a little bit about the GDS booking share that you have. It looks like it was about 20 basis points lower than it was last year, and last quarter was essentially flat. I’m just wondering if you could talk about how your share is tracking versus your expectation. And then, also, just to play devil’s advocate for a second, Venezuela was something you cited on last quarter’s call and we also knew about the Easter holiday. So when you think about how you tracked versus your guidance once you guys kind of aware of those before – when you gave guidance back in May?

[Tom Klein:]

Yes. First, Heather, on the guidance portion, yes, we’re aware of those. About 1% of the revenue was in the core businesses, 2% in Travelocity. A portion of that 2% in Travelocity was because we purposely pulled back our marketing spend as we try to get better visibility into the effects of the Expedia platform and the new dataset that we’re receiving from Expedia to work our digital marketing and our campaigns off of. We just decided it was prudent to pull back a little bit on marketing spend at the expense of some revenue. So a portion of the revenue, that 2% down in Travelocity portion was because of, again, purposeful pull back in spend. Venezuela – we would consider in most countries a 10% debt as a really big debt. In Venezuela we’re staying at 40% debt as carriers around the world and effectively stop flying to Venezuela in the current period. We saw more of that as we got into the second quarter. But as we look forward, as far as our GDS growth and you mentioned market share, let me talk about both share, and kind of customer wins, losses. We are acquiring new customers at a good clip. We haven’t lost customers. The booking share has moved around primarily because of – we have obviously a big base in North American business. North American growth is nearly compared to the rest of world. So we really have a weighting issue of our big business in North America versus the rest of world as opposed to seeing any kind of customer deterioration. In Europe, we’re growing about twice as fast as the market, but again off of a relatively small base. So we continue to believe that this forecast of 1 point to 1.5 points of share in EMEA is an achievable goal for us and we picked up a little bit of share in Asia. So as we look across the globe, we feel very comfortable about where share goes longer term, because we are acquiring new customers at the expense of our competitors. We did that last year as well, and we’re starting to see new customers layer in this year across the globe.

[Rick Simonson:]

Heather, this Rick. So, overall that 20 basis point you talked about share is right year-on-year, but overall we’re a net gainer of customers given the growth of the market. I think Tom has explained the puts and takes. And, again, on the little bit of revenue, I think on the core businesses were pretty spot on. The majority of it is related to Travelvelocity where we purposely throttled a little bit, the marketing and therefore the revenue as we fine-tune the model we’ve got that working now and we’re going to ramp up marketing spend accordingly to get that incremental revenue in the back half related to Travelvelocity. On Venezuela too I can give a little bit look here, given that we’ve had July coming in. We had good cash collections there. So we’re off to a good start and as you recall we can only recognize revenue in that market when we get to the cash. In Q2, we didn’t have that level of cash collections. We talked about that. We had strong in Q1. I mentioned that I didn’t think that it was reasonable to expect that same level in Q2. It’s kind of how it played out, but we’ve done a real good job and off to a real strong start in July and early August here in cash collection. So Q3 in Venezuela the market has stepped off significantly.

[Tom Klein:]

Yes, and again in Venezuela we’re up in the 65% or so share range. So as Venezuela declines it’s another place where again this proportionately we kept customers, but we took a hit on share because of the softness there.

[Heather Bellamy:]

I appreciate it. Thank you.

[Operator:]

Thank you. And our question comes from the line of John King from Bank of America

[John King:]

Great. Good morning, guys. Thanks for taking the questions. I just got three quick ones if that’s okay. First, one with on the GDS, so the Travel Network side, the profitability there looks pretty strong. Can you just dig into a bit what’s behind that? Is it mix, is it EMEA? And if it is mix can you just give us a sense as to which regions within EMEA or elsewhere you might be taking share where that is being publicly driver for that margin? Second was one Travelvelocity. Obviously the sales were a bit weaker there. You spoke about that, the profit came in largely as expected. It’s clearly that it’s something that it’s quite difficult to forecast. As we go forward, you got an new business model there. And as far as the question therefore is what’s the operating leverage in the business model, meaning that if you beat or you were to miss your expectations as the rest of the year on revenue terms what do you think the impact will be the profitability or do you think you can offset that one way or another? And then the final one was just on the Expedia SMA deal is that it now for the working capital impact or would you expect little bit more in the second half? Thanks.

[Tom Klein:]

One I just give a little color and then Rick can fill in a few of these fewer questions, John. On the first one, the GDS business we have a very strong history of being able to both manage the cost as we grow the business and I think the team has continued to do that as we’ve gotten into the middle part of this year. So some of the good profitable performance was driven by good solid cost management. But we are seeing a little bit of lift as we expand our international business and specifically around regions of the world. It’s pretty balanced across Europe. We’re taking business in both developed Europe as well as some of the emerging markets. We’ve entered some markets in Africa, where we’re seeing some growth and we’ve had a good strong history over the last – really over the last six or seven years of growing our book of Middle East business. So we are pretty balanced across where the growth is coming from and we do see a little bit of lift as we expand really anywhere ex-U.S., not just Europe.

[Rick Simonson:]

John, this is Rick. In terms of the simple clear one is Expedia or SMA in terms of working capital impact. We completed the unwind of that as we said in the first half, so you won’t see additional there going forward, so we are right on track. And then leveraging the model, this is a great one to be able to also point out we posted on the website today excel model for everybody’s use that gives historic data and up through the current quarter-by-quarter, very detailed consolidated segment detail for reconciliations. The relevant margins that we report in our Q and some of the other metrics. And so to your point of leveraging model, one we feel good about the revenue in the second half. Remember, second half in total is our stronger half based on the seasonality of the business. Q2 is actually the lowest quarter in general and we talked about some of the other drivers specific to timing for that. So we feel very good about Q3, Q4 on the revenue side. But to your point what we showed in the first half in the second quarter is we do have good flow through and the model. We have ability to very – offset small little shortfalls in revenue that we talked about, primarily one was in Travelvelocity space, not in the core businesses. So in Q2 overall, we had gross margin saver of 47.8% in Q2 2013 that was 47.2% and sequentially Q1 to Q2 we were up over 2 points of gross margin. And in the TN business we are right around 47% gross margin. So again that is a very strong gross margin. We aren’t having margin pressure in the GDS business. And then on the SG&A, you’ve have seen we’ve taken out the cost – general cost control management and the fact that we build our business that way. So I think we can handle that easily any small fluctuations John and deliver the EBITDA and EPS. And that is the big part of why we raised our guidance there, but we also feel solid about the revenue and particularly given some of the booking strength that we’ve seen here as summer is going on in the Q3 that I mentioned in my remarks.

[Tom Klein:]

Yes and John, you mentioned the predictability going forward. I am very comfortable with where we are. We’ve been able to lay out a plan for the back half of the year travel velocity. The pull back on marketing was really around calibrating the marketing to – we are getting a different data set that we had one around the site ourselves. And all of your digital campaigns have run off, the data and the analytics that come out of the system. Our team really needed to digest that, we needed to make sure that ROE, we needed to make sure that our ROI models, our marketing spend where we are generating what we expected to generate as we started the deal within new dataset. So I’m not very concerned about the fundamental performance business. We’ve seen great uptick on hotel conversion rates are better than we expected is performing very, very well. We’re seeing really terrific growth in hotel volumes. It was really just an issue of how do we make sure that we calibrate so that we are not wasting marketing spend after that analytics. So I think we’re feeling good about the business going forward.

[John King:]

Okay, thank you.

[Operator:]

Thank you. And our next question comes from the line of David Togut from Evercore.

[David Togut:]

Thank you. Good morning, Tom and Rick.

[Rick Simonson:]

Hi, David

[David Togut:]

Could you comment on GDS booking fee in the quarter? I apologize if I missed it, but I didn’t see what it was and what any year-over-year change might have been.

[Rick Simonson:]

Yes, David, this is Rick, we don’t give out on the quarterly the specific booking fee, but again to the margins, you can see that our combination of the booking fee and the incentives allowed us to actually increase gross margin, and we’re growing very well in the European market. As we said, we were going to selectively take share there and that’s a profitable, above average profitable market and we’ve had balance performance in the other market, so I think that gets to your point hopefully?

[David Togut:]

Yes that’s very helpful, thanks. Just a quick follow-up. Can you give a sense of what’s underlying pricing on a like-for-like basis my market? What you’re seeing in terms of pricing i.e. are you raising the fee or it’s just a question of mix?

[Tom Klein:]

Yes, David, we’re not seeing anything different than what we’d expect a normal run in a quarter. And again as we look over this over the arc, it’s performing as we talked about. We see low single-digits increase in pricing and we’ve seen low single-digit increase in incentives, but we’ve been able to manage that to a net benefit over the years and we are continuing to do that. So there isn’t anything to call out or observe that we’re seeing in any particular market that’s unusual and certainly not on a quarterly basis.

[David Togut:]

Understood. Thank you very much.

[Tom Klein:]

Thanks.

[Rick Simonson:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Ashish Sabadra from Deutsche Bank.

[Ashish Sabadra:]

Good quarter guys. Solid momentum in the solutions business and based on all the win study you’ve highlighted on the call looks like we could see some uptick in revenue growth over there. So I would just, my question there was more around the pipeline for new business and also if you could comment on your success in cross selling more solutions into your existing customer base?

[Tom Klein:]

Thanks, Ashish. Yes, I think look across the business as I mentioned, the pipelines that we have across all the solutions in the airlines solutions business as well as the hospitality solutions business, we have very good pipeline activity. Year-to-date we are ahead of where we expected to be from a new customer acquisition perspective which builds the implementation pipeline for revenue, some of which we’ll see in the back half of this year, much of which we’ll see as we get into next year. So we feel very good about where we are with the pipeline. I think the performance in the Airline Solutions business in particular is impacted by, at the beginning of last year, we had big implementations kind of at the end of 2013 and into the beginning of 2014, which gave us really good volume growth in 2014, that’s all anniversaried and we don’t have CSS, Sabre Reservations Customers coming on in 2014, as we work contract pipeline to bring new carriers in which we expect to see more of certainly in the early part of 2016 where we will see American Airlines and will see (indiscernible) in that period. But we may be able to pull some business into 2015 as we work the current pipeline with some small and midsize carriers. So, that’s where our focus and again I think as I mentioned good demand across the solutions and good demand from a regional perspective across the globe.

[Ashish Sabadra:]

That’s great. And just a follow-up on the same the EBITDA margins for solutions. So we thought some good operating leverage in that business over there. How should we think about margins going forward? I understand you also have implementations? The American Airline implementation you talked about. So how should we think about the leverage and margins for solutions going forward?

[Rick Simonson:]

Yes, Ashish. Thanks for that. Very much as we said, we ended 2013 at adjusted EBITDA margin for Solutions right on 30% on a segment level. And as I said expected over the medium term which is the three year plus-mine is that we would be going through 35% and on our way to closer to 37%, and you saw some of the flow through that here in the quarter very strong EBITDA margin. Part of those is a reflection of where we are in the cycle, so we had good flow through there but we’re well on track. And in terms of then below the line related to the implementations, we’re fairly low in capitalized implementation cost right on the CapEx relative to conclusion side, because we aren’t doing those implementations right now. That will start to come on particularly in 2015 as we do the implementation, hence we capitalize that for even PB growth that we’re going to have American, Air Berlin and some other smaller implementations, so that hopefully gives you a flavor of both for the EBITDA flow through and then going below that help the capitalized the implementation cost will ramp up accordingly. And again, we’ve laid that out, and we break out that implementation costs in the model there by quarter, and you can see that.

[Tom Klein:]

I mentioned PRISM in my comments and it’s just one example of where across the portfolio, it’s a good size line of business, we’re not going to be breaking down a product level, but it’s a SaaS solution, it’s highly valuable, there’s nobody else that’s doing what we’re doing to help airlines optimize their corporate contracts. And all we see expansion there, and every time we add a customer to that SaaS stack, there’s just terrific flow through. So I mean we’ll add more and more of those overtime when we have – again that’s why our view is that, having the breadth of solutions that solve lots of problems for hospitality customers, our airline customers that we can deliver in a way that’s really efficient for us and really efficient for our customers should result in margin expansion, and those solutions we don’t see the implementation costs that Rick talked about, that we would see on a reservations deal, which is a big integration effort, no matter what the size of airline is.

[Ashish Sabadra:]

I know, that’s great. And one final question from me, and this is just a follow-up to the GDS share. I was just wondering if you could talk about the competitive environment, and especially with orbits for potentially opening up two other GDSs and then you continuing take share in EMEA, and you talked about taking share in Asia Pacific as well. So how should we think about the market share, maybe in 2015, and going forward? If you could just provide some more color on that front? Thanks.

[Tom Klein:]

Yes, I think first, it’s hard for me to say before that, where our go-to-market strategy has the best product in the world, and we think we have significant differentiation at this point across the products set, and I’m talking about things like TripCase and mobile capabilities that we develop or the mobile version of Sabre Red. Those are – were the only ones in the market with those types of solutions. So as we go out and talk to customers, we’re leading with product and we believe we can take share anywhere in the world. So I think, our view is that we’ll be a net share gainer overtime. We’re certainly biased to trying and grow share ex-U.S., but we’re happy to take U.S. business and build on the big leverage business we have in United States and Canada and the rest of the Americas. But we feel very good about being about being able to take share anywhere in the world, and we’re going to do it by leading with product and innovation. Imagine in corporate market as well, where multi-nationals really due diligence and they recognize the innovation. So we launch something like TripCase and we’ve customers, the quality of General Electric to be in a set that signs up shortly after launch. It feel really good about our capabilities and being able to attract both new business with existing customers as well as new customers.

[Ashish Sabadra:]

Great. Thanks for the color. That’s it from me.

[Operator:]

Thank you. Our next question comes from the line of Gregg Moskowitz from Cowen & Co.

[Gregg S. Moskowitz:]

Hi, thank you very much, and good morning. I know that the American and U.S. Airways merger provided some pricing constrains this year, but starting in 2015, do you remain comfortable that the average booking fees from the providers should be able to return to modest growth?

[Tom Klein:]

Yes, I mean, it’s – we have modest growth this year despite that, it’s just not at historical levels, and we think we’ll bounce back to historical levels. We’ve talked about growth in GDS business in the 4% to 6% range, it’s not going to be that this year, we fully expect that it will be in that range, as we get into 2015 and feel comfortable with that as mid-term guidance.

[Gregg S. Moskowitz:]

Okay. Thanks, Tom, and then Rick, naturally there’s positive seasonality in the second half as you alluded to, just wondering as you might be able to give a bit more color on the level and timing of the planned marketing spend in the back half of the year, that will more or less effectively keep your full year expectation for Travelocity unchanged? Thanks.

[Rick Simonson:]

Thanks, Gregg, and first seasonally, you know, primarily it’s driven by our core businesses, the distributions, TN business, and the solution business, and then in terms of – and we feel good about that build in Q3, Q4 and particularly in the travel network business, given that, as I mentioned, that is where it’s coming in strong so far, in terms of the cash collections, I guess, it’s a kick start, and we’re also seeing booking strength as we exited the quarter and as we’re looking into July. Then to Travelocity, Yes, we like say, we’ve done the implementation, that’s all gone, great things are working to the model, you’ve heard also Expedia express a very good satisfaction with this model, and we would reiterate that. We did pull back to the tunes of millions in marketing spend in Q2, which caused us a multiple of that – of revenue, but we wanted to make sure that we get it right, we think we can do that now and so we’re going to ramp that up in Q3, and that’s the biggest ramp up and we expect it to deliver that revenue, you know, a little bit short fall and more in across Q3 and Q4. So that’s why we give good confidence of reiterating the full year revenue guidance, even though, we did a shortfall in Q2 that was driven, you know, primarily, the big majority from this Travelocity marketing issue, it’s going to be resolved.

[Gregg S. Moskowitz:]

Very helpful. Thank you.

[Rick Simonson:]

So you got the CFO telling, hey that’s Travelocity, to spend more on marketing and we both feel very comfortable and lined on that. This is going to drive positive incremental revenue, and we’re at a point where we’re getting good return on that and we’ve got really good diagnostics into that real time.

[Gregg S. Moskowitz:]

Perfect. Thanks, again.

[Operator:]

Thank you. Our next question comes from the line of Brian Essex from Morgan Stanley.

[Brian L. Essex:]

Hi, good morning, and thank you for taking the question. I was wondering if maybe if you could speak to penetration in new geographies, how you see pricing relative to, I guess existing business in those geographies. Is it a better pricing environment, you have that visibility yet, and what is the outlook for that kind of going forward?

[Tom Klein:]

Yes, I’ll talk a little bit about by segment, Brian, and I’ll talk about directionally how we think about it. Certainly, as we’ve talked about a lot, in the travel network business, GDS pricing ex-U.S. is better almost everywhere, more favorable to us in some markets as much as 2.5 or 3 times the U.S revenue on a unit basis. So, again incredibly attractive to grow ex-U.S. In the airline solutions business, it’s a bit of a, it’s more by carrier segment than it is by region. So a carrier that is sophisticated, that is in an alliance, that uses the full set of services and really gets benefited, the optimization tools that we provide either on the revenue or the cost side, you’ll get more – a better price out of those carriers to using a fulsome solution using more services. So we’ll see price list based on the type of carrier more than we will see on a regional basis. But I mean, if you look at things like in Asia Pacific, in our airline solutions business, we have 51 customers, pretty balanced book, 33 of those customers are using our operations solutions, 28 are using commercial systems, and about 34 are using one component or the other of our SabreSonic CSS reservation solutions; 12 of them are using the whole core SabreSonic reservation solutions. So pretty good balance, and as we look at price, again, it really varies by type of carrier more than it does by region. And then turning to hospitality, again it’s really, it’s by segment. So the focus service or the select service as the industry likes to refer them, refer to that – let’s call it a two star category of hotels where there’s lots of hotels out there, their cost model is different and the pricing model for the services they’re using needs to be different versus full service hotel that has a spa and has restaurants and all the various business services they require, will pay more if they’re using bigger bundle of services. And I think we’ve seen that to be pretty consistent regionally.

[Brian L. Essex:]

On hospitality side, are you seeing that as a more competitive market than you have been before and is that more of the kind of incumbent vendor that you’re looking to displace or is it more of a legacy solution or is it more of a greenfield opportunity in the hospitality space.

[Tom Klein:]

I think it depends on where in the hospitality space. But look, I think it’s more competitive, because we are in the business now in the meaningful way. So we are adding sales people. We like our growth rates. We think we are one of the players that will continuing to grow. We are hitting all segments of the market, some in independent hotel all the way up to the biggest brands, and we are expanding regionally. So I think it’s more competitive, but partly because we are in it. And we are growing our sales force and we are adding to our product set. So, I mentioned we just came out of beta with the significant release of our property management system. The SaaS based solution, we are targeting that segment I talked about a minute ago the select service segment – it’s the biggest segment. It’s got the biggest new hotel growth globally, it’s growing in all regions in the world. So we like that segment and we think there is room for disruption there and SaaS based solution for our select service hotel versus having servers in a hall and then pass it in your hallway is a better solution. It’s a less expensive solution and again we think we'll deliver innovation in a SaaS solution quicker than some of the current premise based providers can do.

[Brian L. Essex:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Bhavan Suri from William Blair.

[Bhavan Suri –William Blair & Company:]

Hey, guys. Thanks for taking my question. Just one, I wanted to touch on the virtual payment offering and see if you could provide a little color on sort of how does that work and then sort of are you capturing a portion of the payment processing fee, as part of that offering.

[Tom Klein:]

Yes, I mean we are, it’s not something we spent a lot of time talking about, but we – our customers are responding to virtual payments. It’s a nice secure way to manage your expenses, both corporations and travel agents are interested in. And it’s really a win all around, credit card companies like it, banks like it and our customers like it. So we have it in the mix, it’s growing pretty quickly, but it’s a pretty small part of our business today.

[Rick Simonson:]

We’re partnered with a provider there Bhavan and Yes we do share there. So again for all the reasons Tom has mentioned that's why it’s attractive and we do get incremental economics.

[Bhavan Suri –William Blair & Company:]

And just a follow-up, is this applicable to sort of, when you look at international travel, and you look at multiple segment booking hotels, multiple flights, rail et cetera. Does this enable a travel agent sort of manage that spent without sort of putting them at risk from anyone of those vendors sort of canceling are going bankrupt and stuff does this address that issue.

[Rick Simonson:]

That was my chance that I wanted to get your thought.

[Tom Klein:]

The primary driver, this is really convenience for, the companies are managing their spent and having a efficiency in their process, so when you think about, let’s use an example of oil rig or outfitters, companies, big companies who are moving along, a lot of crews around and they have to manage that spent. They are going off. They are hitting flights. They are hitting hotels, and it’s used that card where we can then set, pre set the prices, here is the X hundreds of dollars for the hotel, here is X hundreds of dollars for the meal spent, all of that set, you don’t have to then worry about the processing and approving that later, you don’t have to then issue credit cards to those travelers, you don’t have to ask them to use a private credit card to that, all of that, increases cost administration hassle and the possibility of leakage, and so it’s primarily for that, not so much medicating, credit risk of a provider from a airline, or excuse me, a provider, travel agent, I wouldn’t think about it that way.

[Bhavan Suri –William Blair & Company:]

Okay. That’s helpful. And then one quick follow up for me. On the low cost carriers, where you guys have a good footprint. Just any color in sort of how that business is tracking and sort of, as you look at that and look at the growth especially in some of the emerging markets there, sort of your share specific in that segment versus the competing providers?

[Tom Klein:]

Yes, again, there is a bid size business, but I think in certainly in the travel network business, we have depending on how pure you are with your classification at low cost carrier. We have somewhere between 17 and 75 low cost carriers participating in system around the world And a low cost carrier still have to operate in the airline, they still have to match price, they still have to manage crews. So we are uniquely positioned, I mentioned spirit earlier, uniquely positioned to provide airline life spirit with operation systems that can help them to drive their cost down and help them run their airline better. So we can sell into low cost carriers with our whole portfolio of the airline solutions again the approved contracts on, they may be less complex than a carrier that’s been around for a long time, but they still have to manage their crew. They still have to manage their aircraft and their maintenance. So our solution so nicely into low cost carrier segment and we have kind of lot of them in our portfolio and have to had good growth rates out of low cost carrier segment across the globe.

[Bhavan Suri –William Blair & Company:]

Great, that’s helpful. Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Jason Kupferberg from Jefferies.

[Jason Kupferberg:]

Good morning, guys. Can you talk a little bit about our G&A trends that you expect to see from the second half of the year I think for Q2 at least relative to our model you came in a bit better than we were expecting, so any thoughts on – kind of how second half might trend, obviously good to see the overall margin guidance for this year, but just want to make sure we have the piece parts right.

[Rick Simonson:]

No. We feel pretty good about it we don’t see any dramatic change in terms of G&A, we missed on those efficiency, now I wouldn’t mention, if you see SG&A we are doing a little more on the sale side as Tom mentioned in the airline solutions to take – hospitality solutions to take advantage of that marketplace and the growth in the different regions and around our product, and but I think Jason you should see again good steady performance on the G&A trends in the back half.

[Jason Kupferberg:]

Okay. And then if you just take a step back and think about your overall top line outlook X Travelocity. I think last quarter you may have said that you fully expected to meet or potentially be in that range and obviously reiterating that range today. In terms of just your confidence level of potentially beating the range any material change there since last quarter.

[Tom Klein:]

No, and as I said the build up to that in travel network we were looking at, last time we spoke 1.5% to 2% for the year, and I think it really was that range at that point and now we’re more comfortable as I said in my remarks of – we feel that we should be towards the top end of that range and that’s for the reasons I mentioned with the bookings growth that we’re seeing so far to-date in Q3 its early. And again good collections in Venezuela because that’s one that can swing them even within that range and, so we feel pretty good about that, and the solutions side is pretty predictable given where we are with the solutions set there and the visibility that we have, so that’s what we are able to reiterate our total saver guidance for the year even with a bit less in Travelocity in the first half so if you look at our core businesses we feel real solid about that, but I am not going to get carried away here, but it is set up well, and we’re seeing some strength as we come into Q3.

[Jason Kupferberg:]

That’s quick one just on Venezuela obviously down 40% in Q2 did it get any better in July.

[Tom Klein:]

No. Well, Tom here. I mean, I don’t think we’ve seen any meaningful balance there as Rick mentioned it’s kind of two things, one is carriers divested at the market because they can’t get money out of the market.

[Jason Kupferberg:]

Yes.

[Tom Klein:]

So that’s obviously an issue. And then for us it’s an issue of both booking declines as well as trying to get paid.

[Jason Kupferberg:]

Right.

[Tom Klein:]

And as Rick mentioned we’ve had decent success in getting paid for the work that we are doing, but the volume has been significantly down and it does – I don’t – I wouldn’t venture the forecast that they are going to bounce back at least in the near term.

[Jason Kupferberg:]

Understood.

[Tom Klein:]

Thanks Jason.

[Jason Kupferberg:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Kash Rangan from Merrill Lynch, Pierce, Fenner & Smith, Inc.

[Tom Klein:]

Hi Kash

[Kash Rangan:]

Guys, thank you. Thank you for taking my question. Good morning.

[Tom Klein:]

Good morning.

[Kash Rangan:]

I wanted to get some color on the get there, when you talked about the Fortune 20 company or so. If you can elaborate on how big the opportunity for travel booking is in the corporate sector and what competitive advantage does Sabre have relative to your competitors? And also may be comment very quickly on, I think, on Concur talked about the open booking platform. How do you view that as it relates to opening of the industry more or implications for your business? And I think you talked about in your openings remarks similar initiative at least the way it sounded to me but I wasn’t sure if I got the application correctly so that will be great, if I can hear you thoughts on that. Thank you.

[Chris Nester:]

Sure [Ash] (ph), thank you very much. In the corporate market we have direct agreements for either GDS services or corporate booking tool with 70 or so of the top 100 corporate spenders in the United States. So there are the biggest multinational companies in the world. We have direct relationships with them and again some of them for both for our GDS services and the corporate booking tool get there, some of them are for one or the other of those services. In the quarter, we closed, as I mentioned the top 20 from a spend perspective company to use both to get their corporate booking tool as well as Sabre GDS. It’s a big win, we can’t disclose the corporate name but it’s the top 20 customer, or top 20 Fortune Company. As far as our strength there what we're seeing and what we’ve gotten from the U.S. multinational is as they’ve globalized their business to increasingly expanding our services into global markets and that’s helped us pickup some incremental market share in various markets around the world. And more companies as I think about duty of care for their employees as well as that managing the global spend have started to say, we’re going to use the same travel procurement process wherever you want in the world with the same set of technology. And we are by far the go to Company when a multinational want to do that, we think we can extend that to other regions of the world. As far as open access to content that’s not in the GDS, which we do today, we put some focus with, we call our offering through trip and through trip and capture content that a corporate traveler book outside of the GDS for whatever reason, and integrate it back into the GDS. So that again the corporation can have visibility to it, they can take care of their employees appropriately and they have visibility into spend. So we have that capability today, so it’s not new at least for us, it’s not new. We are expanding that capability to the integration tighter. So integrate with TripCase so that for a traveler they can put the top contain in more easily. And then finally, the initiatives I’ve talked about, are very much focused on opening up the Sabre system, to allow developers to innovate by either connecting us with the content that we don’t have today, or creating new services for travelers and travel agents. And again we are the only one in our competitive set out we are doing and it’s the best practice and technology, I said that the industry is behind. And they were behind we were first to market in the segment and our competitors are not even talking about anything like it.

[Kash Rangan:]

Okay thanks Chris.

[Operator:]

Thank you and our next question comes from the line of (indiscernible).

[Unidentified Analyst:]

Yes thank you. So Rick can you talk a little bit about the factor is behind strong EBITDA growth in the solutions business and what can make revenue growth in that category accelerate? Also if you can comment about how should we think of the impact of Oracle buying Michael’s on your Hospitality business.

[Rick Simonson:]

Yes we are on the EBITDA and the real new on the Solutions business again, this is somewhat cyclical because you have rather large list in lumpiness in the reservation business, which is over half of our revenue in the Solutions business, Airline reservations. So that’s why this year, we are predicting or seeing the revenue growth that we see over a longer arc, we delivered around 14% of revenue growth in the three years prior to this. We expect in the midterm to be in the 12% to 14% revenue growth across our Solutions business. And that range in Airline Solutions and that or more in Hospitality Solutions. So with this year, again we see the 7% to 9% top-line growth and its function just growing in the operational and commercial suit, and then getting the organic growth from our already large over 500 million passenger boarded installed base on a reservation. And we’re seeing that in the 5% to 6% range. So that’s the buildup of the revenue, that’s what we’re going to see for the rest of the year, it’s as we’ve communicated before, no change, no drama there. But we’re really well set in terms again of this 12% to 14% over the longer arc, we’ve been there, we’ll get there again. And as you saw the point through the business again it’s just efficiency there, we’re getting the pick up at the gross margin level, that I talked about is we’re going to increase said that as a function of scale across the product and the platform. And then we’ve had good G&A control in the business. And there extending through the technology platform. So just good operating across the business, as we said as we scale this business, we’re going to start to see flow-through and that’s what we expect in the back half.

[Tom Klein:]

And on Oracle’s acquisition Mike was we were very bullish on Hospitality space. We believe it’s been underserved that’s been proving out as customer response are offering, which is very high service and very high customer satisfaction around a very contemporary offering, versus what has been a primary legacy environment for in the Hospitality space. And we’re big customer of Oracle we operate with micros customers to make sure that when we are in a customer together that our systems work well together and customers get good service. But we’re going to be – we’re going to have deep expertise in the Hospitality domain and we’re going to focus on delivering software. And we’re already in the focus on Solutions that solve problems for Hospitality that help them drive revenue, often on the cost side of the business we’re helping to create better guest experiences. And that narrow focus feels really good and might be an advantage versus comparators that are focused on the big horizontal markets.

[Unidentified Analyst:]

Thanks Tom.

[Operator:]

Thank you and we have time for one more question today. Our final question comes from the line of Bob Mcadoo from Imperial Capital.

[Bob Mcadoo:]

Hi, yes most of my questions been answered, but a quick, could you just educate us just a little bit on Spirit united Darwin sales that we have? For the those kinds of applications what is the implementation timeframes? And how does the revenue flow from implementation once you get actually into the operation of those systems.

[Tom Klein:]

Yes, that’s a great question, thanks Bob. It does vary by the size of the airline and the type of solution. The United Catering solution is implemented across the United Fleet today and we are beginning implementation across what was the Continental fleet. So while the airlines integrate I really don’t like taking about them that way, but they do have specific fleets of the aircraft that came with the merger and the way the solution gets implemented is across the fleet. So it’s probably year so to extend into the different aircraft types across the remainder of the fleet. And a deal like the Sprit deal that should be, that could be as any near implementation, you feel a little bit of revenue from that, towards the tail end of this year. And then at Darwin some of the solution will start producing revenue in 90 days or so, and others will go out a little further. So again we think about something like a crew solutions where the customer has a lot of work with the implement contract rules, and to rules [engines] (ph), and the like, those jobs generally take a little longer. A flat solution like PRISM, which I mentioned or like the scheduling software that we provide were clearly best-in-class, with 23 of the top 25 airlines in the world using a scheduling software. That’s from contract implementation, we’re seeing revenue in about three months.

[Bob Mcadoo:]

And something like the United System, so that would imply that you’ve been getting from the legacy United side, then you’ve been getting a stream of revenue, and so this is an add on. And is there a fee that gets collected as you are helping them put this up into the Continental side, or is it just, as more airplanes to get put on, you get more transactions?

[Tom Klein:]

The later, it’s the latter. And again our customers like transitions based models, we need to. So whether its number of departures, numbers of meals served, that is right in pricing metrics that will work with the airlines on some of these operational solutions

[Bob Mcadoo:]

Okay, great thanks. I appreciate it.

[Rick Simonson:]

Thank you, Bob.

[Operator:]

Thank you. And that concludes our question-and-answer session today. I’d like to turn the conference back, for any closing comments.

[Tom Klein:]

Yes, thank you again for joining us this morning in the next flight our exciting journey. So we appreciate you interest in Sabre and we look forward to speaking again at the end of the third quarter. Have a great afternoon.

[Operator:]

Thank you. Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.