Sabre Corporation
Q4 2014 Earnings Call Transcript

Published: 18 Feb 2015

[Operator:]

Welcome to the Sabre Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Barry Sievert, Vice President of Investor Relations. Please go ahead, sir.

[Barry Sievert:]

Thank you, Shannon, and good morning, everyone. Thanks for joining us for our fourth quarter and full-year 2014 earnings conference call. This morning we issued an earnings press 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 investors with additional questions to follow up with Investor Relations. Throughout the call today, certain of our earnings per share, EBITDA, gross profit, net income, capital expenditures and free cash flow amounts, 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 restructurings, litigation and tax matters, and certain other items. The most directly comparable GAAP measures and reconciliations are available in the earnings release and other documents posted on our website at investors.Sabre.com. We would like to advise you that our comments contain forward-looking statements. These statements include, among others, disclosure of our outlook, including revenue, adjusted EBITDA, net income and earnings guidance. And 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 differ materially from the statements made on today's call. Information concerning the risks and uncertainties that could affect our financial results is contained in our SEC filings, including the Company's final prospectus filed February 5, 2015, and our Form 10-K for the year ended December 31, 2014, which we plan to file early next month. Participating with me on today's call are Tom Klein, our President and Chief Executive Officer; Rick Simonson, our Chief Financial Officer and Chris Nester, our Treasurer and Senior Vice President of Finance. Tom will start us off with a review of our fourth quarter and full-year 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 for your questions. With that, I'll turn the call over to Tom.

[Tom Klein:]

Good morning, and thank you again for joining us today. 2014 was a strong year of strategic and operational progress at Sabre. And we enter 2015 as an industry leader well-positioned for solid growth. Looking at the results for the fourth quarter, total Company revenue was $646 million, a 3% increase, while adjusted EBITDA increased 2% to $199 million. Adjusted earnings per share for the quarter totaled $0.22. In our Airline and Hospitality Solutions business, strong execution and customer growth drove a 40% increase in revenue, and our scalable technology platform delivered 26% adjusted EBITDA growth, demonstrating really great positive operating leverage. In Travel Network, revenue declined 1% and adjusted EBITDA declined 9%. Our performance absorbed the impact of headwinds that buffeted the business almost all year, which we will soon anniversary. And a few very specific items that are unique in the fourth quarter, which I'll discuss in a moment. In summary, as expected, our solutions businesses performance was strong and our Travel Network business had a soft quarter, adding up to a solid but muted quarter on the whole. Looking more closely at Airline and Hospitality Solutions, 125 million passengers were boarded through our SabreSonic CSS reservation system in the fourth quarter, an increase of 4.5%. Without the addition of any new SabreSonic CSS implementation. So this was all driven by organic growth from current customers. Our broad portfolio of leading commercial and operation solutions also continued to perform well. In total, the strength across Airline and Hospitality Solutions produced revenue growth of 14% for the quarter. Excellent flow-through from our SaaS-based solutions drove a 26% increase in adjusted EBITDA to $85 million, resulting in an adjusted EBITDA margin of 39.6%. Airline Solutions uniquely goes to market with a broad sweep of best-in-class solutions, giving us a distinct advantage when competing for new business. In the fourth quarter, we expanded in Europe by contracting with Alitalia for a broad technology suite, including SabreSonic CSS reservations, AirVision commercial, and Air Centre operation solutions. Also recognizing the value of our integrated best-in-class solutions, Panama-based Copa Airlines contracted for a similarly broad sweep of technology solutions. These deals further add to our SabreSonic CSS implementation backlog that now totals more than 250 million passengers boarded - business that will drive growth in 2016 and 2017. In Hospitality Solutions, we launched our new SynXis Enterprise Platform, a fully integrated hospitality platform designed to enable hoteliers to build their business operation around the guest experience. We were excited to recently announced that Wyndham Hotel Group, the world's largest and most diverse hotel operator, has selected Sabre and will roll out our SynXis property management system for 4,500 properties. This entry into the enterprise space is a breakthrough unique to Sabre and a position that we expect to build upon. In summary, Airline and Hospitality Solutions finished the year strong, with record full-year sales, revenue and adjusted EBITDA. We have strong momentum, including a robust pipeline of implementations, sales and new innovations as we enter 2015. At Sabre Travel Network, direct bookings were up 1.1% in the quarter. Our performance was led by strong bookings growth of 7% in EMEA and modest growth in the Americas, dampened by continued weakness in Venezuela. Revenue declined 1%, and adjusted EBITDA declined 9% in the quarter. As we've discussed, revenue and adjusted EBITDA growth were affected throughout the year by the pricing impact of the American Airlines and U.S. Airways merger. Fourth quarter results absorbed the impact of reduced data processing revenue from one of our joint ventures, which was not due to a decrease in volume, but rather the accounting treatment on the timing of revenue recognition. On the expense side, the fourth quarter was also impacted by the timing of recognition of certain cost-of-revenue expenses compared to fourth quarter of last year. These two impacts are unique to the fourth quarter. As we've discussed previously, we will anniversary the majority of the headwinds during the first quarter, setting the stage for expected stronger growth in 2015. Consistent with our strategy, we're nearing the completion of our exits from the online travel agency business. As I'm sure you've seen in our recent filings and today's release, we've reclassified the segment to discontinued operations. In the fourth quarter, we received a binding offer for lastminute.com from Bravofly Rumbo Group for a total consideration value of approximately $120 million. We're in the process of clearing regulatory approvals, and expect the transaction to close in the first quarter and just last month, we sold Travelocity.com to Expedia for $280 million in cash. Looking back at our full-year 2014 performance, it was a year of strategic progress and important milestones for Sabre. Total revenue increased 4%, while adjusted EBITDA grew 8%,highlighting the strong operating leverage in our solutions business. Full-year adjusted earnings totaled $0.94 per share. Airline and Hospitality Solutions continued to build its market position, with 10% top-line growth and a 33% increase in adjusted EBITDA. This growth was underscored by the biggest sales year in the history of both businesses, punctuated by key wins with American, Air Berlin, Alitalia, Copa Airlines, as well as China's H&H Hotels and Resorts, and the Wyndham Hotel Group. Our expanding technology leadership is based on delivering vital innovative solutions to help our customers meet their biggest challenges, especially in the areas of data and analytics, personalization and mobile. Our most recent technology introductions and airline solutions include Intelligence Exchange, Dynamic Retailer, and Customer Data Hub - solutions that align with the important customer trends to leverage data. In Hospitality Solutions, we introduced the introduction of the SynXis Enterprise Platform as a unique offering that integrates flexible solutions for the entire spectrum of customers - from the independent hotelier to the world's largest hotel chains. And we'll continue to bring innovation to market. The latest being InstaSite, announced just yesterday, a turnkey web solution that can be customized and launched in less than a week. We also continue to build the strength and the value of the Travel Network, adding thousands of new hotels and dozens of regional airlines. We extended the reach of Travel Network through TripCase Corporate and TruTrip, key differentiators from our competitors. TripCase managed more than 30 million trips in 2014, which we believe is significantly more than any competitor in the industry. We also signed important new agency and corporate customers and we continue to build our presence in Europe, expanding our share by 140 basis points across EMEA. With the anniversary of the headwinds during the first quarter, continued strong momentum in EMEA, and improving economic and capacity trends in North America, we expect stronger growth in 2015. At Travelocity, we realized approximately $500 million of total value by exiting the OTA business through the sale of multiple properties and brands over the last couple of years. This has allowed us to further de-leverage our balance sheet. And it increases our strategic and operational flexibility going forward by allowing us to double down on our focus and investment in our core areas of strength and competitive advantage. In short, were focused on competing where we can win. The Airline and Hospitality Solutions business finished the year strong, and enters 2015 with considerable momentum. In Travel Network, we maintained global share, increased our presence in EMEA, and positioned the business for better growth going forward. With that, I'll turn the call over to Rick to walk through our financials and full-year guidance.

[Rick Simonson:]

Thanks, Tom. Q4 adjusted EBITDA performance was a result of good revenue growth across Airline and Hospitality Solutions, and particularly strong earnings flow-through. A quick recap of the consolidated quarterly results. Revenue was $646 million, an increase of 3% year on year. Q4 adjusted gross profit totaled $280 million, a 9% improvement from the same period in 2013. And total adjusted EBITDA increased 2% to $199 million. Sabre consolidated adjusted earnings per share totaled $0.22 for the quarter. On a full-year basis, revenue was $2.6 billion, an increase of 4% year on year. Adjusted gross profit totaled $1.1 billion, an 8% improvement from 2013. And total adjusted EBITDA increased 8% to $840 million. Sabre consolidated adjusted earnings per share totaled $0.94 for the year. Moving to the balance sheet and resulting cash flow. From Sabre consolidated EBITDA of $199 million, we generated $40 million of adjusted free cash flow, bringing our full-year adjusted free cash flow to $293 million, an increase of 61% over the prior year. Total adjusted CapEx ended the year at $265 million. Total net debt was $2.9 billion as of December 31, reflecting significant debt reduction this year, driven by the IPO proceeds. Resulting in a net debt to trailing 12 months adjusted EBITDA ratio of 3.5 times. Pro forma, for the $280 million of Travelocity.com sale proceeds, our leverage ratio would be 3.2 times. With the sale of Travelocity.com complete, we are well within our target leverage ratio range of 3 to 3.5 times. While we continue to invest effectively in the business to drive profitable growth, we are generating increasing levels of excess cash. We will use excess cash in the following order. First, payment of our regular dividend, with a target to grow it through increasing net income, and possibly increasing our target payout ratio. Second, share buybacks and/or strategic M&A. We have a proven ability to take on a bit more leverage and quickly de-lever back to our target range if we identify compelling opportunities above and beyond our current mid-term expectations. Foreign exchange has been top-of-mind, given the rapidly appreciating U.S. dollar. At Sabre, I want to point out, we are different from many U.S.-based global technology companies, as approximately 95% of our revenue is building U.S. dollars. And about 20% of our operating expense is in foreign currencies. Therefore, we really have no material foreign-currency risk in our revenue line. The benefit from operating expenses denominated in depreciating currencies is largely offset in the short-term, as we have always partially hedged with a series of rolling hedges. Let's turn now to the 2015 outlook. During the IPO and since, we've talked about our medium-term targets for revenue growth, defining the medium-term as three years, plus or minus. In Solutions, we said we expect 12% to 14% growth, on average, across this arc of time. For Travel Network, growth of 4% to 6%. We remain confident we will achieve these average growth rates over the period. We expect our commercial momentum and implementation backlog to yield accelerated growth in 2016 and 2017, supporting our growth targets for Airline and Hospitality Solutions. In Travel Network, a more supported macro environment and the passing of 2014's headwinds give us confidence in hitting that range, on average, over the period. We'll continue to share our medium-term expectations and targets as we move through 2015 and push into the outer years. Our 2015 guidance supports these medium-term goals. In 2015, we expect revenue of between $2.77 billion and $2.8 billion. In Airline and Hospitality Solutions, we expect revenue growth of between 9% and 11%. This growth will be driven in part by expected passengers boarded, growth of approximately 10%. Passengers boarded growth is anticipated to be below this level through the first three quarters, and significantly above the level in the fourth quarter, due to the expected timing of customer implementations. Passengers boarded growth will be impacted by the departure of one of our smaller customers in the first quarter, a customer that is returning to a pure play, low-cost carrier model with less robust reservation systems. At Travel Network, for the full year, we expect revenue growth of 4% or more, driven by bookings growth of around 3%. We will anniversary the impact of the AA/U.S. Airways merger and the Venezuela impact during the first quarter. And we expect to continue to outperform in Europe, Middle East, Africa. Additionally, we believe macro trends are supportive of higher bookings growth. Recent data points and forecasts indicate higher capacity growth in 2015 versus 2014, which includes a material step-up in North America, our largest market. With lower fuel places that give airlines more flexibility in pricing to stimulate demand, and more money in consumers' pockets, we believe we are positioned for stronger growth in 2015. Moving to earnings. We expect adjusted EBITDA of between $895 million and $910 million. We expect adjusted net income of between $275 million and $290 million, resulting in adjusted EPS in a range of $1 to $1.06. In 2015, we expect to see acceleration of free cash flow growth that we've been discussing. We expect more than $300 million of adjusted free cash flow, and over $250 million in free cash flow in 2015. The primary difference between these two being essentially the last of the American Airlines credits. GAAP CapEx is expected to be approximately $250 million. As we ramp up to deliver our implementation pipeline, capitalized implementation costs will step up, and are expected to be approximately $75 million. However, this amount is expected to be fully offset by upfront cash solutions fees. I'll now turn it back to Tom.

[Tom Klein:]

Thank you, Rick. In total, 2014 was a year of transition with purpose. We narrowed our focus on areas where we have great competitive positions and where we can win. The strategic work we've completed gives us flexibility, and positions us to deliver greater expected growth and stability - rare for a technology Company - as well as increasing cash flow. We enter 2015 a more focused and flexible organization, leaning into our strengths. We carry significant momentum in our Airline and Hospitality Solutions business, and we believe that Travel Network is positioned for stronger growth ahead. And with that, I would like to ask our operator Shannon, to open the call for questions. Shannon?

[Operator:]

[Operator Instructions]. Our first question is from John King of Bank of America. You may begin.

[John King:]

Just a couple if I can. Firstly on the data processing revenues obviously that was a little bit late for Q4. From your partners there including can you just talk what are the assumptions are making for the full year for 2015 on those revenues and whether that kind of ounces back here that was the first question. And then again I know just going through the numbers that the gross profit growth is quite a lot stronger than EBITDA growth so Rick if you could just talk us through the moving parts through what's going on there and the cost base would be great. Thanks.

[Tom Klein:]

John, let me start with the joint venture processing revenues. Just to be clear, as I said in my talk, the volume of processing was significantly up year-over-year. There was a timing issue with how that contract was structured which has recognized the majority of the revenue in 2000 on sorry in the first three quarters whereas in 2013 we had a big adjustment in the fourth quarter due to how the contracts are structured with minimums so it wasn't a volume issue and we expect that next year will we will again recognize the majority of the revenue from that processing of the first three quarters of the year. And we won't have the bad year-over-year comp.

[Rick Simonson:]

John, and in terms of gross profits EBITDA for the ratio we had additional public company costs and the SG&A line and then specifically to the fourth quarter you know we had revenue growth of 3.1% adjusted EBITDA growth of 2.4%, and again this was largely impacted by the Travelocity or excuse me the Travel Network we had great froufrou great margins great flow-through to the operative margins in the solutions business. And in travel network what we had there was again we were impacted by some of the factors on the top line that we had a bit of rule true ups in the cost of goods sold. And that we needed to catch up over the year there. And that impacted fourth quarter and is Tom mentioned in his prepared remarks, those are unique and one time in the fourth quarter. We scrub that and we won't see that going forward.

[John King:]

And then if I could just sneak one more in. On the solution side of the business obviously the PB gross wasn't actually that strong but you at least the selling a lot of other stuff so what will the big drivers air in terms of outside of the reservations product where you are seeing the particular strength in that side of the business.

[Tom Klein:]

John, I would say it's actually pretty balanced across the portfolio. So both the commercial solutions and the operation solutions are competing well in the markets as said before that you can compete on a best of class deal on any one solution. And where often selling these bundled deals are portfolio deals are were selling multiple solution so again it's pretty balanced across the portfolio and as I mentioned we started to really add some new innovative product into the market as well. So we have pipeline for some brand-new lines of business. Some of that got sold in 2014, but we already started to see traction in this year.

[Rick Simonson:]

And we've got to not forget Hospitality Solutions. That's part of our solution segment in Hospitality Solutions while not the state significantly smaller than Airline Solutions on revenue is growing fast, and faster. And that helps contribute to that.

[Operator:]

Thank you. Our next question comes from David Togut of Evercore ISI. You may begin.

[David Togut:]

Embedded in your 3% bookings growth assumption for Travel Network this year. Could you drill down into your assumptions for passenger traffic growth by major region and to the extent your building in share gains and EMEA if you could discuss the major drivers behind that.

[Tom Klein:]

Yes. I think I'm the capacity sidecar, David, we're pretty much using third-party data from people like Boeing and Airbus and were fairly conservative with our assumptions I me at capacity growth is just one factor and doesn't translate percentage point for percentage point to bookings growth. That said, let me talk about EMEA we've been we said 140 basis point improvement last year, from a share perspective we feel like that one too wanted half-point points a share is achievable. We answered 2000 215 is a number of contract 30 so that need to be implemented in Travel Network business so we feel confident across EMEA between a new markets that we've open we opened more than a dozen new markets across EMEA as well as some of the conversion cells we arty have that will be able to continue at this pace of 1% to wanted half-point year that we had a couple years running being able to achieve.

[Rick Simonson:]

And David on regionally north America although bit more color. As I reference that the main thing in terms of seeing that kind of bookings growth is also driven by the fact that North America is our business biggest market and the corporate travel environment we believe is improved and will be improved in 2014 compared to - in 2015 compared to 2014 and in the other things we talked about Inc. terms of the capacity it is a lagging string is Tom mentioned but all else equal you've got alike the fact that people are expecting capacity to increase in 2015 versus 2014 including in North America and the impact of fuel prices in terms of how the airlines might use that to stimulate demand to absorb that capacity and consumers might have a little more discretionary income. Again we think those are good macro things but we're really first relying on there's more robust corporate environment and then pick up some of those macro things on a little bit of a lagging basis.

[David Togut:]

And it's a quick follow-up. Could you update us on the status of the timing of the conversion of the American airlines solutions contract also air Berlin.

[Rick Simonson:]

Well we've been saying is will have this pipeline implement in potentially a piece of it in late 2015. The large majority of in 2016 and then some of it will be in the early part of 2017. It's really the carriers to say and announce when their hobbies cut overs in their reservation system for the provider they need to lead on when they're going to cut over and some of them have publicly announced that yet so I'm not at liberty to do so.

[Tom Klein:]

The thing is we've got flexibility here in terms of working within a carrier schedules and that American airlines is coming first for us in the order but air Berlin, Alitalia, Copa that shows the robustness of our portfolio and we can work to implement them in different slots across that time, as Tom mentioned and work with the carriers on that.

[Chris Nester:]

And just to be clear you know where on-air expectation I just am not at liberty to say. The other thing to note though is almost portfolio deals so the Alitalia, the Air Berlin, the Copa deal. Where implementing audit today. Because we have again we have a broad portfolio of solutions so some of the commercial software and air balloon is an example is in alerting and were starting to get revenue for this we are seeing revenue from these deals much sooner than the reservation cutoff with the bigger chunk of revenue is what we do the reservation cut over.

[David Togut:]

Understood and a quick final question. Rick you alluded to the possible use of proceeds from the Travelocity sales should we assume all that goes toward debt pay down this year?

[Tom Klein:]

Again, David as I mentioned on pro forma we be at 3.2 if we used it for that. In terms of debt pay down what we’re looking at is you’re well aware in our capital structure, we exercise what we could on the 2016 bonds using the proceeds from the IPO. Our 2019 bonds that are 8.5% start to have some call ability in May 15 so May of this year and what will look at is whether we can opportunistically refinance that and look at the mix of the cash coming in from Travelocity sales and again as we look at strategic M&A that will be the toggle on that but we feel real good about where we are on the capital structure our ability to get increasingly lower interest costs at any given level of debt and it's great to have $280 million in the bank from the sale of Tecon [ph].

[Operator:]

Thank you. Our next question is from Brian Essex of Morgan Stanley. You may begin.

[Brian Essex:]

I was wondering if you could dig in a little bit into some of the headwinds you had last year and if there's any way to kind of quantify that if you have Expedia multi-sourcing, you got the merger and you've got Argentina. As you lap that this year is it entirely immediate - it sound like most of it is lapped in the first quarter but maybe we could quantify it a little bit and then offer a little bit of how that might impact seasonality through the year or at least how it compares over the year.

[Tom Klein:]

A couple - really it was too is the American Airlines U.S. Airways contract on the Travel Network side which that pricing consolidated at the merger approval in the first quarter of last year. So that piece will anniversary this quarter, it's little more than a point of growth. The other impact was Venezuela and those of you who follow the airline industry, know that almost every international carrier has stopped selling tickets in Venezuela some of them are flying a limited schedule into Venezuela, but volumes there are down more than 50% year-over-year. In 2014 versus 2013. I don't see a recovery insight there based on what's going on with the government. And I don't believe it gets significantly worse, so I think we will largely see that year-over-year again about a point year-over-year anniversary here in the first quarter. But again I think it could be a little worse than it's been but I don't think it'll be a big step down. So Venezuela the place where we have almost the high 60s percent market share we have a couple of carriers using the reservation system down there so it's for us it's a reasonably large market.

[Rick Simonson:]

So starting in Q2 this year those are fully anniversary in those two account for more than 2%. So it bridges from our 2% growth of last year to 4% all else equal. And then we talked about some of the other factors that we expect to take advantage of that keeps us above that 4%.

[Brian Essex:]

And then just kind of one question on the orbits acquisition. How you might anticipate that might impact your business going forward if you see any kind of a material change on the horizon due to that business combination or is that a relatively immaterial for you.

[Tom Klein:]

I think it's just too early to say I mean it's Expedia's got a lot of work to do and we have a great relationship with them by the is too early to say what will result from the orbits acquisition.

[Operator:]

Thank you. Our next question comes from Jason Kupferberg of Jeffries. You may begin.

[Ryan Cary:]

This is Ryan Cary for Jason. Just a quick question looking at the airline solutions that of the business is it safe to assume most major carriers also really haven't outsource reservation system? Or are there still big portfolios that are currently doing this in-house may come up for [inaudible] and just kind of on the back of that, Alitalia and Copa is a something he had done previously in ulcers is a win from a competitor.

[Tom Klein:]

Let me start Alitalia and Copa. So Alitalia is in-house, Copa was the only reservation system. So a competitor. As far as the portfolio that's available out there is talked about selling into about 1 billion passengers boarded that will come up for bid over the next couple of years. And in that are still some of the largest carriers around the world. So there are still a number that do that have an in-house reservation system or a reservation system that's more or less custom to them. Even if a third party is providing the majority of the services and we think all of those overtime will be opportunities. So funny business to go get and in every single bid so we feel good about our ability to convert a chunk of that pipeline.

[Ryan Cary:]

Great. And it seems like today most of the acquisition focus has been more focused wearing on the solution side of the business so I was a little surprised to see in the recent as one talking acquisition on the Travel Network side. I know it's still earlier but are you able to give us a little more color on the acquisition, and maybe how it improves the offering, the competitive posturing etc. etc.

[Tom Klein:]

We really can't word an awkward spot with that. We disclose we had to disclose because we were doing and we offering as you know. That's all we can disclose at this point I would just say that it's unique opportunity and we're excited about it and we'll see where it goes.

[Operator:]

Thank you. Our next question is from Jim Snyder of Goldman Sachs. You may begin.

[Jim Snyder:]

I was wondering if you can provide a little color on your expectation for 2015 within solutions in terms of the growth rate relative between airline and hospitality and I guess given the color you gave on the customer roll-ins and implementation dates, do you have relatively high confidence in the revenue growth assumptions you put in there kind of bracketing the changeability in those days.

[Tom Klein:]

I think first of all one of the unique characters of the businesses we do have an awful lot of recurring revenue we have very, customer retention rate so as we enter year we have pretty good confidence on our visibility and revenue there certainly a chunk of it like in any technology company that needs to be sold in year and turn into revenue in your. But again we have we going to years say north of 80%. Of good revenue visibility. So we feel good about what we've laid out. We don't have big CSS implementation so no reservations implementations and 2015 with the exception of again potentially in the fourth quarter. We may be able to bring one of them in in the fourth quarter. But for the most part, on the reservation site it's organic growth, and we continue to sell our operations and hospitality I mean our operations in commercial solutions into those into airlines all over the world even in the single portfolio deals and hospitality will continue to outgrow airline solutions.

[Jim Snyder:]

And then as a follow-up within the solution segment also the margin levels that your achieving kind of running about very high 30% rage in line with what you talked about being able to achieve is there an opportunity going forward for those two kind of those margins to move up from here and how you think about the relative reinvestment levels in that business versus what you let drop through the bottom line.

[Rick Simonson:]

We had very strong margins in the back half and exclusions that this great flow through over 29%. And for the year we heard about 36% in 2014 and the guidance for 2015 is expecting similar level overall for the year. Around that 36% level. In solutions. As we talked about that's right on where we expected. That puts us moving from in 2013 830% unit level, to the high 30s as we go through this midterm expectation. And will always in the second half it's a little stronger seasonal but we expect that to be solidly right in that upper Midshipman range, and as we talked before, our expectations on the medium term for the high 30s, certainly isn't any kind of limitation as we continue to get scale and leverage in the business. And as I mentioned, you know will keep updating you as we start to push out into 2017 and 2018. Deeper but remember, we've got from where Hospitality Solutions was significantly below that kind of margin level, in 2012, 2013 at 2014 at the unit level, and with its scaly and growth is going to start to close that gap while we were also putting on additional scaling getting the benefits on that as we do these large implementations on airline so we feel good about where we are in 2015, we feel good about that medium term in the high 30s but it isn't certainly a limitation.

[Tom Klein:]

I think the other thing that I don't want to get lost here is our CapEx is essentially a big chunk of it is our Road. And our ability to invent and to innovate is significantly different from what our competitors are doing and we continue to put new product in the market weather is things like the SynXis Enterprise Platform which gives us access we think to a segment of the hotel industry that's not been cracked by any of our competitors or whether it's some of the announcements that we've made in the airline solutions around a product like intelligent exchange and other that that is. So we’re disciplined about that, we continue to invest in new product on new lines of business where we either think there's a market segment that were missing or there's a solution that works going to need for our customers that continues to broaden our portfolio so will continue to not just acquire tokens and solutions business but will look to organically build new innovations and deployed them into the market.

[Rick Simonson:]

Right and we never make a trade-off of keeping margins that 39 because we headed in a couple of periods and sacrifice profitable additional growth in a business that we don't think is anywhere seeing the limitations of what's available in the addressable market with the market share leader.

[Operator:]

Thank you. Our next question comes from Bhavan Suri of William Blair & Company. You may begin.

[Bhavan Suri:]

I would just wanted to touch - continue touching on the Italian solutions business for a second. With SynXis Enterprise Platform you launch. Just any sense of early traction and sort of the ability to pull those things the reservation of the property management systems together. Our customer conversations going and what is sort of pipeline or early thoughts and pipeline look like for 2015 at 2060.

[Tom Klein:]

Our customer conversations have changed in a really positive way. The Wyndham is as they said the broadest and most diverse operator of hotels. In the first quarter, your earlier in this quarter we sold for seasons, on the SynXis central reservation system portion of the platform, so if you think about the selection of hotels in the Wyndham portfolio and then the four seasons all the way on the other side from a luxury perspective that scale, and we have a lot of other luxury change like Mandarin and Shangri-La and others in the portfolio. I think that's gotten a lot of everybody's attention that we have that breadth of solution I can handle that breadth of hotel. And it is the desire of the industry our view has been the desire of the industry is to have a single view of the customer to the central reservation system in the property management system so our conversations are going very well I think it's a matter of were going to be patient in the large segment part of the market for the enterprise market, we don't want to be a custom developer here for those big hotel groups. We want to leverage the platform we have and that's exactly what we’re going to do with Wyndham and for seasons and we hope a lot more.

[Bhavan Suri:]

That sort of get to my next question. Which is to get away from being a custom solution develop - you know your largest competitor that's would be doing a custom developer for Intercontinental and they've shown the ability at least in the past to leverage one development to one customer and then across multiple others. But obviously on premise versus cloud. How do you feel from a differentiation competitor perspective against them and if you could also just touch on if MICROS, anything of it is part of Oracle are you seeing them less aggressive in the market just be great to get some more color on the competitive environment.

[Tom Klein:]

Let me just draw a couple of differentiation, one is we signed a contract with Wyndham in the fourth quarter and will see revenue in 2015 from that contract. Our competitor doesn't have a solution today and as far as I know they don't have a contract with IHG they have some partnership agreement you have to ask them but I view IHG as being in our pipeline today and will continue to knock on their door. As far as MICROS they're very big and property management we haven't seen any significant change since the Oracle acquisition of MICROS and they continue to be a good competitor we can property than in some cases but I think in general our view is that when big horizontal players like Oracle by an asset like MICROS that's generally favorable to a player like us to really is focused on domain expertise and very focused on a set of capabilities that are specific to the experience that hotel was to deliver and were not trying to sell them databases and other sets of software were really focused on their customer facing technology and their operational technology.

[Bhavan Suri:]

And in just one quick one. Maybe for the team, but in the core business on the Travel Network said. The Expedia rollup of Travelocity and Orbitz underestimate. And you Expedia one from having one provider on the GDS IT to and now potentially the orbits side going out I know it's early but just your thoughts around the risk of sort of a third player tying into Expedia to drive sort of just average market share down. How should we think about that and how worried to be about that?

[Tom Klein:]

Like I said I think it's pretty early, I think we do a great job for Expedia. I think the diversification that they did was a risk-based diversification that made a lot of sense for them. And I know we talked about for a long time we still have the lion's share of their business and I think we do a great job for them. We haven't had any discussions that would suggest differently.

[Operator:]

Thank you. Our next question is from Ashish Sabadra of Deutsche Bank. You may begin.

[Ashish Sabadra:]

Solid momentum in the solutions business, I just want to focus more in the early commercial and operation solutions. Malaysian airlines announced yesterday that they are going to implement your solutions airline solutions. I was just wondering if you could just comment on the pipeline both the implementation pipeline as well as the prospect pipeline for that commercial and operation solutions within airlines. And also what are the key drivers for this accelerated growth, is it more like your success in cross-selling to existing customer base, the aging IT infrastructure for airlines and also how are the lower oil prices playing into those decision-making processes? Thanks.

[Tom Klein:]

Okay. So let me walk for a couple of things. First I think that again very profitable airlines and if you look at kind of the stunning results that the industry is having right now from a profitability and cash perspective. It's just a good environment for reinvestment and spend. So we like the cycle that has technology that requires that needs to be upgraded. So we’re going to upgrade cycle across the number of solutions and then just the ability to buy I think we like that environment as I said and as Rick mentioned a 2014, we had the best sales year that we've ever had in both airlines and hospitality solutions as far as new sales. And it's really a combination of a few things. One, we absolutely cross-sell and sell the integration value of the portfolio which nobody else can tell that story. And we continue to work hard to integrate across the portfolio. You're kind of never done with integration so - but having operation systems that talk to commercial systems and vice versa, matters and we talk about the benefits and we think we uniquely understand those benefits both operationally and commercially for our customers. And the second thing I would say is that as we've gotten deeper and deeper and as you go from transition from premise-based software to an ASP model to a SaaS model, frankly we’re just leaving some competitors behind. So we had a lot of boutique competitors across our portfolio who just can't keep up with the base of that technology change over doing it at scale across a lot of solutions work, so we’re walking and talking about not just the software side of things but the service side of things and we have best of class capabilities on the operational side that again keeping up with what's going on in data centers, and use of the cloud is the changes there are just stunning and it's hard for small competitors to keep up. From a pace perspective, where the reservations businesses you will see a handful of deals a year that we're bidding on. The pace of this businesses we’re seeing 20 or 30 or 40 sales activities every week so whether it's an upgrade or a new sale in solution, or an add-on, it's that kind of pace. So again very balanced across the whole pipeline, it's a nice balance versus a reservation business which is lumpy. But the business will always be biased to those big reservation deals that drive us spike in revenue in a unique way, but this is just kind of steady eddy and we’re very deep and broad in that portfolio.

[Ashish Sabadra:]

Just quickly Rick, I believe you mentioned that there is going to be a departure of one small customer in the solutions business I was wondering if you can just quantify how big the impact is from that?

[Rick Simonson:]

It's pretty small and it's in the 11 million of [inaudible] under 10 million kind of level. So it somebody that again change of ownership there, they've gone to a bare-bones reservation system and so that does have the impact that I talked about. But it isn't as safe think onto another full-service or robust reservation system. We see that every so often and it really is an every so often case. Pretty rare.

[Ashish Sabadra:]

And just quickly on the free cash flow we saw some good improvement in the free cash flow in 2014 and you've got 300 million plus of free cash flow in 2015 which equates to a free cash flow conversion of about one. How should think about the free cash flow going forward once you onboard to 250 million PBs in 2016 and 2017. Just wondering if you could just provide a longer term view of free cash flow growth going for.

[Rick Simonson:]

As we said, we feel really good about 2014 we're seeing a little stronger than what we asked acted there so that's great. And we continue that momentum in 2015 and we start to get to the cleanliness of the financials where you can start to see the free cash flow in 2015, 2016 and 2017 really coming. The difference between the 300 adjusted and 250 million again is a legacy of that one line item adjustment around the AA settlement cost. So going forward, as we talked about before, with the growth first in solutions that are double digit on the top line over this arc of time, the low single digit growth in Travelocity or Travel Network with stable margins, great cash conversion solutions double digit top line growth with the expanding from mid-30s to higher 30s margins and continuing to have effective CapEx that's what really starts to get us into that level where we talked about in 2017 we would be looking for somewhere in the range of 500 million or more in cash flow and that really starts to show the power of the model and we got a nice proof point we believe that will come up in 2015 off a stronger than guided to 2014.

[Operator:]

Thank you. Our next question is from Manish Hemrajani of Oppenheimer. You may begin.

[Manish Hemrajani:]

The airline hospitality EBITDA was at historical peak in the fourth quarter, can you maybe talk about seasonality in EBITDA in both AHS and TM [ph] and then should you expect them to be along similar lines to 2014. What percent of AHS segment contribution comes from the reservation system

[Tom Klein:]

We haven't given breakout of specifically on the different segments in solutions the reservation, the AirVision, AirCenter and hospitality, but as we've said the in the past in our 10K coming up we will give the breakout between revenue in hospitality solutions and revenue in the airline solution. So you will have those point data and again our CSS reservation business as we talked before is been around 50% of so of the total airline solutions business. But there is volatility in that right as you recognize revenue in a little bit lumpy way in terms of when implementation of those businesses come on as Tom alluded to before. So then when it comes to seasonality, we typically have had a little bit of better margin structure in the back half of the year, I would say in the solutions business but going into quarters I think you can draw miss conclusions about - over conclusions one way or the other about predictability of exact seasonality between Q1, Q4, year-to-year because it's really driven by a little bit of the lumpiness of the reservations business.

[Manish Hemrajani:]

And then we've seen you guys within the Alitalia contract in EMEA and one of the competitors winning the Southwest contract in North America. Can you maybe talk about some of the reasons why or why not one solution was chosen over the other and what are you seeing on the competitive landscape is it largely a two horse race? Thanks.

[Tom Klein:]

Yes I think first of all I would say we feel like we're almost in every bid for every solution in the airline business and we’re generally bidding against one other person. And so it depends on the solution we’re selling. And it depends on the shape of the airline. But it is increasingly rare for us to see other than Navitar and Amadus [ph] in the reservations area, and then in most of the other suites there is kind of single competitors that are global. There are good competitors that are on a regional level, but we feel like we have a shot to be in every deal and to be down selected in every deal and have a decent win percentage. So we feel good about our ability to compete in general. From a standpoint of the why each deal and we have talked a lot about Southwest in the past. I think I'm going to pass on going into anything further on that I think from an Alitalia perspective, we have talked to Alitalia about a broad set of solutions that would help enable where they want to take the airline going forward. They have as I mentioned an in-house reservation system, that they were struggling to get what they want out of it as they look at restructuring the airline. So they will use our technology for a broad set of initiatives to help reposition the airline in Europe. And they've gotten some new capital infused into the airline, and we’re part of that turnaround plan.

[Manish Hemrajani:]

And then you talked about 1 billion in PBs [ph] may be coming up for renewal in the next two or three years how much of that is legacy versus one of the competitors.

[Tom Klein:]

Yes, let's call it of the billion PB's that we believe will go out to bid, we think somewhere between 650 million and 700 million of it is either kind of a legacy competitor or in-house system. And the remainder is kind of on us or one of our competitors and the retention rates of the business are very high so we would expect to hold onto the business we have I suspect our competitors is expected hold onto the business they have so we think this $650 million to $700 million out there that's fair game. Some of those will decide or they'll kick the can on deciding. But again we think we will win our fair share.

[Operator:]

Thank you. We have time for one more question. Our next question is from Abhey Lamba of Mizuho Securities. You may begin.

[Abhey Lamba:]

So in your outlook revenue growth you’re assuming revenue growth to be in line with [inaudible], well you just posted by four points of extra growth in 2014, and historically also I think your revenue growth is always outpaced passenger boarded. So can you talk about the puts and takes for 2015 that would talk about the impact from existing customers - leverage from existing customers.

[Tom Klein:]

Yes on the passenger boarded side, we said plus or minus the industry growth rate. So the industry growth rate at least again I'll go back to Boeing and Airbus forecast is about 5%. In 2014 were out about 7% so better than market. This year we expect as Rick mentioned the first three quarters to be a little bit, a little bit south of that 5% mainly because we have one customer migrating to a pure low-cost carrier model with the different type of reservation system in and we expect to pick up in fourth quarter. Based on our implementation pipeline so it's going to be a little bit of an uneven walk to get to the 10% or so passenger boarded that we forecast for 2015.

[Abhey Lamba:]

And given the implementations that you mentioned to be expect growth rates to explode into 2016 and 2017 as you are adding more customers to the end of this and the American Airlines rollout is happening later optic

[Rick Simonson:]

Absolutely. That's again why we believe it's quite supportive of our medium-term targets of 12% to 40% growth overall, we set the stage for that and the beauty of this businesses you win these big reservation deals, you've got the contract saw you start the implementation cost so that aspect it looks pretty good and you can pencil that in your models in 2016 at 2017 and the timing can vary by a few weeks or quarter as Tom mentioned, but we’re solid on that.

[Operator:]

Thank you. And now I would like to turn the conference back over to Tom Klein for closing remarks.

[Tom Klein:]

Well thank you again everyone for joining us for the call this morning, we appreciate your interest in Sabre and we look forward to speaking to you again sometime soon including at our upcoming Analyst Day on April 2nd in New York we hope a lot of you will be able to show up for that. Thanks a lot and have a great afternoon.

[Operator:]

Ladies and gentlemen this concludes today's conference. Thank you for your participation. Have a wonderful day.