Q2 2019 Earnings Call
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Thank you for holding May I have your conference code.
It is 5769738.
Thank you and now your first and last name please.
Last name Bitch VI C H.
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Thank you in your company name please.
Iraq felt they era.
E.R.A.. Thank you Michael one moment please.
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If an NDC and next generation retailing, including the introduction of NDC, guys with United and the rollout of our next generation storefront with Delta.
Lodging content expansion, new focus on our saber virtual payment solution in partnership with visa and the first GDS to migrate all of our shopping complex to the cloud.
In the second quarter, we increased our booking commitments with it.
Hi, Turkey's, leading OTA and travel services integrator and signed a significant renewal with travel and transport a large corporate travel a large corporate travel management company.
As of quarter end, we are tracking well with respect to key conversions at you travel group, a large European OTA and with respect to our deepened business relationship with Carlson Wagonlit travel.
Finally on the supplier side, we signed 14 deals in the quarter, including renewals at lot and air Europa and three new supplier agreements.
Finally, as expected our incentive fee per booking growth moderated to low single digits in the quarter.
In airline solutions, we feel good about the progress we have made over the past two years and believe we have a healthy sales pipeline, we have locked in approximately 75% of our revenue through 2023.
Total contract value up for renewal over the past two years, we had a strong renewal rate of 94%.
We expect solid revenue growth in line with or above growth in global travel over the coming years. After we anniversary some near term impacts and we expect this new revenue will come in at high incremental margins.
At Sabre technology at the Saber technology exchange, we officially Demoed Sabre commercial platform. The most significant upgrade in over five years.
At Aeroflot, we signed a new deal for shopping cash and our retailing suite and a renewal and upsell of movement manager.
Ethiopian Airlines signed a deal for dynamic availability, a big data solution that is part of the initial rollout of sabre commercial platform.
We signed another share of wallet increases at go air and Finnair and key renewals at Copa Croatia Airlines, Alaska Airlines and Air France.
At hospitality solutions, we are the clear global leader in Central Reservation systems, we have over 42000 properties live on our solutions all around the globe.
We expect continued strong growth in hospitality solutions revenue at a 7% to 9% rate over the next several years as we expect to continue to gain scale in our fragmented and underpenetrated market.
We completed the industry's first and largest enterprise hotel implantation with Wyndham, including our acquisition of looking to which we implemented at the start of the second quarter.
At Sabre technology exchange, we Demoed the first for the first time intelligent or intelligent retailing platform. Our vision for next generation hospitality retailing that enables attachments of ancillary products and experiences by concert tickets and dinner reservations for the core booking.
In the second quarter, we implemented products at 1500 incremental properties at new and existing customers. We close the share of wallet increase at with coho Raz for Sabre property hub. Our next generation Hotel property management solutions multiple other key wins and renewals were signed in the quarter, including charisma and hard rock International.
In terms of technology, we expect to invest over 1 billion. This year in total.
We are continuing to build out our global cloud landing zone, and now have over 55% of our total compute footprint in the cloud, including our entire travel network shopping complex.
In the second quarter, we completed the final cutover of travel network's air shopping out of Tulsa out of the Tulsa data Center.
All shopping request are now being split across cloud landing zones in the us and we're now handling peak traffic of over 11000 travel network shopping request per second.
The majority of our public cloud compute footprint is currently with within the Amazon Web services. We now have cloud landing zone set up with Microsoft as your supporting our multi cloud provider strategy and are preparing to deploy multiple airline solutions in hospitality solutions products, there, including Sabre Sonic web and our Scynexis Central reservation system.
Later this month, we are planning to move the airline solutions shopping workload out of our Tulsa data Center.
Future steps will lead to the global distribution of web service services gateways and seat availability, culminating in the expected launch of shopping in EMEA and or Asia Pacific next year.
Before I turn it over to Doug I want to take a moment and address our green our agreement to acquire fair logics.
We are continuing to engage with the US department of Justice under a second request as well as the UK competition and markets authority to communicate the significant customer benefits that we believe will arise from the deal.
Last November we first announced our intent to acquire fair logics, a recognized innovator in the travel industry with advance offer management and NDC order delivery technology used by many of the world's leading airlines.
We remain passionate about our original decision to bring our two organizations together and the positive impact we can have on the travel ecosystem. We expect fair largest complimentary products offering will accelerate our delivery of the industry's first end to end airline retailing solution.
We believe together saber unfair logics can make MDC, which is currently still in early days with minimal bookings grow into a reality that helps our airline customers become better online retailers through the creation of dynamic offers that meet the personalized demands of today's travelers.
As I mentioned in the letter I recently wrote to the top airline Ceos around the world. We we intend to continue to supporting our customers retailing and distribution strategies, regardless of channel and fully support and develop or logic suite of products and services, including direct connect tape of capabilities. We continue to engage with the regulatory authorities about the benefits of this acquisition and why we believe it is good for our customers good for travelers and good for competition.
Turning back to the quarter the business is performing well on the strong foundation, we have laid our solid second quarter performance commercial wins, leading innovation and infrastructure progress gives me confidence in raising our full year 2019, 2019 earnings guidance and with that I'll turn the call over to Doug to get into more of the details of our second quarter results and expectations going forward, Doug. Thank you Sean under Sampras business model. Our revenue streams are tied to travel volumes, which are resilient across economic cycles, and long term contracts sticky solutions and renewal rates are well over 90%.
Let me remind you of the durability of our business model during the great recession. We grew EBITDA every year and revenue grew every year, except 2009, when was down less than 1%.
Looking more closely but our Q2 results.
Revenue was up 2% year over year totally $1 billion in the second quarter recurring revenue totaled 93%.
Revenue growth was driven by solid performance across each of our businesses travel network revenue was up 1%.
Airline solutions revenue was up 3% and hospitality solutions revenue was up 8%.
EBITDA less capitalized software development.
Which reflects our total R&D was down 1% in the quarter.
The EBITDA less capitalized software development pressure was largely driven by a modest increase in travel network incentive fee per booking.
In the quarter as expected incentive fee per booking growth moderated to low single digits versus double digit growth over the past eight quarters.
We continue to make good progress on our cloud migration.
As I will describe in more detail later, our technology transformation is already driving leverage in the model and total technology spend was down slightly in the quarter.
As previously discussed.
The cost associated with our cloud migration and related technology transformation efforts are expensed as incurred instead of capitalized so while our total technology spend went down slightly.
The shift in our capitalization mix cost technology operating expenses to increase in the quarter.
With an equal and offsetting decrease in Capex.
We also saw an increase in depreciation and amortization related to previously capitalized technology spend.
As products are placed into service.
Accordingly, operating income totaled $127 million in the quarter, representing an operating margin of 13%.
The year over year decline in operating income reflects the near term impact to our income statement from the change in the technology expense recognition.
Excluding the increase in technology operating expenses operating income declined 4% and operating margin was down 90 basis points in the quarter.
As a reminder, the capitalization shift has no impact on free cash flow.
EPS totaled 24 cents in the second quarter down 5% year over year, excluding the increase in technology operating expenses.
We believe our financials will reach an inflection point.
We are taking a double hit to our income statement this year related to the capitalization mix shift.
From the increased technology operating expenses due to a lower capitalization rate.
As well as increased DNA from previous capitalization.
But as we look to 2020 and beyond.
The base will be reset we believe we are set up for expanding EBITDA margins as we expect to realize savings from our technology initiatives. Additionally, we expect accelerating operating income and EPS growth.
As DNA rolls off due to expected lower capitalization.
Expected DNA savings totaling approximately $140 million from 2019 to 2022.
Finally, our businesses generated strong free cash flow.
We generated $76 million of free cash flow in the second quarter.
And we continue to expect full year free cash flow generation of approximately 455 million.
We returned $84 million to shareholders in the second quarter via share repurchases and our quarterly dividend.
Now travel network.
Revenue grew 1% in the quarter totaled 725 million.
This was slower than previous quarters, but in line with expectations as we begin to anniversary favorable European carrier pricing.
And the completion of a flight center migrations.
The second quarter represented our sixth quarter in a row of strong GDS share gains.
Our global booking share increased by 120 basis points in the quarter, representing 38.6% share.
We continue to gain share at large global travel management companies, including our expanded strategic agreement with CW TV.
GDS industry bookings declined in the quarter due to a relatively more challenging macro globe on global macro environment, and Easter timing as well as the insolvency of jet Airways and channel shift driven by the three legacy European carrier families.
GDS industry bookings declined 2% in the quarter.
But excluding Jeff and the three legacy European carriers grew 1%.
The maturity and balance of our global customer footprint and new business wins have allowed us to grow faster than the overall GDS industry.
Our largest book of business is in North America.
We have already lived through the arrow pricing pressure and deregulation in our home market.
For the cost of direct and indirect distribution have converged.
Our air bookings increased 1.4% in the quarter, which is in line with the second quarter expectations, we communicated on our previous conference call.
Excluding jet Airways in the three legacy European carriers, our air bookings increased 2.6% in the quarter.
Total bookings in the quarter grew 1%.
Driven by air bookings growth and a modest decline in lodging ground and see bookings.
Hotel bookings grew high single digits in the quarter, reflecting our focus on lodging content expansion.
However.
Consistent with last quarter, our lower margin rail bookings declined in the quarter.
We will anniversary the real impact and expect healthy growth in lodging ground and see bookings beginning in Q4 19.
Looking at the regional level the health of our home market is strong North America is the only region posted GDS industry growth in the second quarter and it was solid at 4%.
We have over 80% share with large travel management companies in this region.
Represent airlines most valued customers.
Our North American bookings grew 8% in the quarter twice as fast as the GDS industry.
GDS industry bookings decline across all other regions.
In Latin America, our bookings declined due to macroeconomic weakness and volatility.
On a volume basis Latin America is the smallest of the four regions, we report and makes up less than 10% of our total worldwide bookings.
As mentioned GDS industry bookings in Asia Pacific in the second quarter were impacted.
By the insolvency of jet Airways, and our bookings declined accordingly.
GDS bookings in India saw a double digit decline in the second quarter versus double digit growth in the prior year quarter. As a reminder, we are relatively less exposed to the Indian market.
And any eight about half of our bookings decline was driven by the impact of low margin rail bookings.
And about half was driven by industry softness due to the channel shift by the three legacy European carrier groups.
Our exposure to the impact of the three legacy European carrier groups is less than the other gdss due to the fact that over 50% of our bookings from those carriers are made outside of Europe and are typically for longer haul higher yielding traffic.
Jet Airways and the three legacy European carriers had a combined three point negative impact the total GDS industry growth in the quarter versus a one point negative impact on saver bookings growth.
Average booking fee declined 60 basis points in the quarter in line with our expectations communicated last quarter.
This was driven by.
150 basis points of negative impact from regional air mix, primarily due to faster growth in north American bookings versus a decline in international bookings.
Partially offset by 100 basis point positive mix impact from the decline in low profitability rail bookings and strong growth in hotel bookings.
Remember that we have anniversaried the favorable European carrier pricing.
And the beneficial mix impact from the completion of the flight Center migrations.
Incentive fee per booking normalized to the low single digit growth in the quarter as expected.
We expect normal inflationary incentive fee per booking growth to remain in the low to mid single digits over the medium term.
We expect margins to stabilize and the 2021, we expect margins to begin to expand.
As a reminder, the high level of incentive inflation over the past two years was driven by large strategic deals, including renewals at five out of six of our top agencies through 2023 and beyond and recent major wins at flight Center and CW team.
Turning back to the quarter operating income totaled $160 million represented an operating margin of 22.1%.
The majority of the margin decline was driven by the impact of the shift in capitalization mix.
Excluding the increase in technology operating expenses driven by the capitalization shift.
Operating income declined 6%.
And operating margin declined 180 basis points the margin pressure was driven by incentive fee growth that outpaced booking fee growth.
And airline solutions after successfully navigating heavy renewal cycle over the past two years, we now have locked in approximately 75% of our revenue through 2023.
With a high renewal rate of 94% based on total contract value.
With our rollout of the industry's first airline commercial platform, we feel good about our competitive position, especially as we believe a large competitor is NT entering a heavy renewal cycle with a significant number of passengers boarded up for renewal over the next three years.
Airline solutions revenue totaled $212 million in the second quarter representing growth of 3%.
As previously discussed there are factors outside of our control that impacted our performance.
These include the insolvency of jet Airways and significant volume reductions at a certain Asian carrier due to unfortunate 737 Max incident.
Additionally, the quarter was impacted by the DEA migrations of Philippine Airlines, and Pakistan International Airlines, excluding these certain carriers airline solutions revenue grew 12% in the quarter.
Sabre Sonic revenue declined 3%.
Passengers boarded declined 8% in the quarter due to the certain carrier impacts I just mentioned.
Excluding the certain carriers passengers boarded increased 4% in the quarter.
Airvision and Air Center revenue increased 15% in the quarter.
This was largely driven by strength in our operations portfolio.
And upfront revenue recognition from local installs. It reflects the success of recent innovation and progress we have made in improving our stability and product health.
Our airline solutions business has high incremental margins.
Airline solutions operating income was down slightly versus the prior year driven by the shift in capitalization mix, excluding the increase in technology operating expenses operating income growth was 61%.
And operating margin increased 660 basis points.
The progress we have made improving our stability and product help.
And other technology initiatives provide operating leverage in the model, we expect airline solutions dip it down margin to expand nicely over the medium term.
Hospitality solutions is the global leader and hotel Central Reservation systems, we have over 42000 properties live on our solutions. This includes the industry's first and largest enterprise hotel implementation with Wyndham hotels and resorts, including their 2018 acquisition of what Kent, the ins and suites, which we fully implemented at the start of the second quarter of this year.
Hospice hospitality solutions revenue grew 8% in the quarter supported by 8% growth in sit Nexus into next the software and services revenue and a similar increase in digital marketing services revenue.
Hospitality solutions Central reservation system transactions increased 28% in the quarter, which includes the benefit of migrating with 10th at the beginning of the quarter as well as certain other Wyndham hotel brands in the second quarter of last year.
The shift in capitalization mix resulted in a modest operating loss for hospitality solutions in the quarter.
Excluding the increase in technology operating expenses, we had positive operating income up 185% versus the prior year and 470 basis points of operating margin expansion.
In the second quarter total technology spend was $256 million.
As a reminder, this includes the cost that we incur with our capitalized or Expensed for hosting third party software and R&D.
Total technology spend decreased 1% in the quarter, reflecting progress we are achieving on our cloud migration and other technology initiatives.
As Sean mentioned, we now have over 55% of our total compute footprint in the cloud.
The scale and leverage we are already gaining enables us to continue.
To strategically invest in new products innovations and infrastructure.
We continue to expect full year 2019 technology spend growth of 3% to 4%.
As discussed on our past two earnings call today, the cost of putting our cloud migration and other technology transformation efforts are not capitalize this resulted in a 15 point decline and capitalization mix from 24% in the second quarter last year to 9% in the second quarter of this year.
Although neutral to free cash flow this shift significantly impacts operating income and EBITDA.
Additionally, the increase in amortization of previous capitalized capitalization resulted in a 4 million dollar headwind to second quarter operating income.
This is of course neutral to both EBITDA and free cash flow.
As a result of the capitalization shift and increased amortization the amount of total technology expense running through our income statement in the quarter increased by $38 million or 14%.
Remember this refers to our total technology spend.
Less capitalized software development costs amortization of previous capitalization.
As I mentioned, our business generates strong free cash flow second quarter free cash flow totaled $76 million down modestly due to working capital timing.
We continue to expect full year free cash flow of approximately $455 million. We ended the quarter with a partner with approximately $3 billion in net debt and a leverage ratio of 2.9 times.
We expect our leverage ratio to continue to naturally increase in the short term.
Due to the change in capitalization mix.
As a reminder, our target leverage ratio is 2.5 to 3.5 times with a preference towards the lower end of that range.
Our uses of excess free cash flow are.
Investments in the business, both internal and external.
Dividends and share repurchases to offset dilution at a minimum.
We repurchased 2.2 million shares for approximately $46 million, including our dividend return $84 million to shareholders in the second quarter.
Year to date, we have returned $155 million to shareholders via the repurchase of 3.7 million shares than our regular quarterly dividends.
We have that we believe the business is performing well and better than expectations. Therefore, we are raising our full year 2019 earnings guidance.
We continue to expect total sabre revenue growth of 3% to 5%.
Two 3.965 to 4.045 billion.
At travel network, we now expect full year revenue growth of 3.5% to 5.5%.
We now expect full year bookings growth of 2% to 4%, reflecting the sluggish GDS market.
However, we expect continued share gain over the back half of the year to drive bookings growth that outpaces the industry.
We have new agency conversions and share of wallet increases in the pipeline that have already been one that are currently being implemented.
Accordingly.
We expect bookings growth to accelerate in Q3 and Q4.
We are raising our expectations for full year average booking fee growth to approximately 1.5%. We previously expected average booking fees to be roughly flat across the back half of the year.
But we now expect about a 1% increase.
By quarter, we expect booking fee growth of approximately 150 basis points in Q3 and roughly flat in Q4.
Airline solutions, we are raising our guidance and now expect full year revenue to be roughly flat year over year.
On a quarterly basis, we expect revenue to be down in Q3, and roughly flat in Q4 due to deal timing.
At hospitality solutions, we continue to expect strong revenue growth of 7% to 9%.
We continue to expect EBITDA of $945 million to $985 million.
And EBITDA less capitalized software development of 850 million $890 million.
We are raising guidance for operating income and now expect full year operating income of 495 million to 535 million.
We now expect a full year depreciation and amortization of 450 million lower than our previous expectations.
Moving down the few now we have raised our expectations for net income and EPS and are now guiding to net income of 250 million to 290 million and EPS of 91 cents to one dollar five.
We continue to expect free free cash flow generation of approximately $455 million.
For year over year growth of 3%.
Remember this represents growth of 11% excluding.
A $29 million insurance settlement payment received last year.
Our capex expectations remain unchanged at 130 million to 150 million.
Remember our business as typical working capital seasonality that benefits the fourth quarter compared to the first three quarters of the year.
In Q3, we expect free cash flow to be consistent with Q1, and Q2 average run rates with a significant quarter over quarter step up in Q4.
In closing.
We believe our business was solid as we look at the rest of 2019 and beyond.
I have confidence in our outlook I remain confident in the underlying performance of the business now back to you Sean Thanks, Doug and we'll let you take a breath and get a drink of water there.
As you can see we're pleased with how the year is progressing and we'd like to once again. Thank the many colleagues around the world for their hard work and dedication.
It is our strong belief that you should have growing confidence from what you're seeing in our actions and more importantly, our results our travel network share gain demonstrates the importance of our investments in products and full cloud deployment of our shopping complex and incentive fee growth significant significantly decelerated in the quarter.
With 15% growth in Airvision and Air Center commercial and operational revenue. We are starting to see improved portfolio helps show up in the results. We have migrated over 55% of our total compute footprint to the cloud and the associated savings allowed us to reinvest and for the transformation efforts, while posting reductions in total technology spend in the quarter. In summary, we are progressing well and have confidence in achieving our full year 2019 goals.
I want to once again, thank you for joining our call today and for gear continued interest in sabre and with that I will ask the operator to open up the call for your questions.
Thank you ladies and gentlemen.
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One moment for our first question.
And our first question coming from the line of John .
From Bank of America. Your line is open.
Yes, thanks for taking the questions Hi, guys.
Just on the delays maybe to the prices with logic. So I'm just wondering how you're dealing with that from an R&D perspective.
Thats kind of course, you to reallocate any investments that pattern you can give us a view on that.
And the nice to see the improvements in the airline solutions business, how big relative to perhaps say this on like how big is that vision and asked them to now and maybe what's the outlook.
That you see in the pipeline for those modules. Thank you yeah. Thanks, John Thanks for joining us on the fair logic space, It's a combination of things and.
I think the important thing as you look at the industry and what's happening in our focus on fair logics and their capabilities and I mentioned in my prepared remarks, we're still early on in this and it relates to anything that we're doing internally and shifting of resources. It's not happening. So we continue to go down that path and work.
To me, there's such positives associated with this this acquisition relative to the transformation that is happening in the industry and to continue to move forward talking with airlines as most talking with agencies around the world. There's this desire to can then continued to move forward.
But we've also learned you know.
And I've often talked about this there's just a lot of work that needs to take place and I couldn't think of a better company to be leading the charge and saver and what we're doing there as it relates to.
The Airvision Air Centre piece of the equation.
You know it is it's a smaller piece I mean sabresonic is the bigger piece on what's taking place. If you. If you go back to some of the health issues that we're having with the products and to be to be pretty candid with you is really on the air center side of the equation.
And what the team has done specifically on crew crew management crew qualification within that product portfolio or that portfolio.
It's just amazing and what you're finding is continued growth and Dave I don't know if you had any comments on.
Either of those.
No I was just going to I guess, what I would point back to.
Thank you for the comments on the.
Recognition of the improvement in the airline solutions business I think one of the things we focused on was as Sean said focused on the health of the health is there.
Then you'll start to see customers upgrade once they start to upgrade as we've talked about they get more current on versions and they can take a cross sell and up sell of additional capability and the growth in Airvision and Air Centre is a good reflection of the health of the portfolio.
And continued progression over the multiyear plan that we put in place.
Including the October launch of the commercial platform and its competitiveness in the market. So we feel pretty good about how those pieces are progressing right now no. John one thing I would add and this goes back to not only what Dave and team have done when he was running airline solutions.
But I have Clinton sitting across the table from me on the hospitality side, and the focus and bringing technology talent and making sure that the products are healthy.
You know what we're doing on the cloud side of the equation, obviously I'm blown away with what the team has been able to do at 55% of our total compute in the cloud where two years ago, we weren't there and what we talked about is how do we essentially take those savings and reinvest in the business and what's nice to see and I really saw this the saber technology exchange in Las Vegas, where we had I think it was close to 1600 customers from around the world.
They were really asking us about our technology sort of evolution and what's taking place.
And it's really great. When you had your customers not only thinking about the products that we have but how do they think about their own infrastructure and transformation that they're going through so just many positive things.
Great. Thank you guys.
Our next question coming from the line of Mark Moerdler with Bernstein Research. Your line is open.
Thanks, and I also.
That's on the improvements we're seeing.
What I'd like to look at is the question of the operating margin operating margin. It's been hit by the move of technology core from capitalized expenses as well as the flip side the amortization of the previously at least previously capitalized second but can you give us some color on how to think about once you get through this process what happens to margins as the increase in Opex.
From expense Tech get fully offset by the drink engine, the amortize tech investments going away.
Yeah. So.
If you're actually correct. So what's happening right now we're getting we're getting hit twice and it sounds by just capitalization shift.
Last year as I mentioned that we capitalized at a capitalization rate closer to 20 or 25% now we're down to nine so those expenses now running through not only EBITDA, but the operating income and net income and then you're correct that high amortization that you get from capitalization. We previously had its now starting to hit US as we move forward, we expect to have the capitalization rate probably moderate in this 9% to 10% range. So we'll no longer be negatively impacted by the rate change and will have a significant benefit from the lower amortization as you move out, particularly into 21 and 22, that's why I mentioned in my comments that there's probably going to be a $140 million benefit between 2019, and 2022 from lower amortization, which Oh, it's absolutely drive rapid margin expansion for operating income net income and EPS growth.
When you're just to clarify.
Well as you get through this once you get to whatever the normalized moment in time, if there ever is one is it basically go back to what you had before it's just simply a shift in the way in which those costs are being recognized I think have to go back a little bit higher and the only reason why I say that as we first did you are actually right that the actual capitalization mix and the amortization will normalize but the fact that we expect our R&D cost to grow at a lower rate than the topline will actually have one more margin expansion than we would have had in the past.
Excellent I really appreciate.
Thank you.
Thanks Mark.
Our next question coming from the line of Matthew Broome with Mizuho Securities. Your line is open.
Oh, thanks very much.
Given that you appear to have a good opportunity to consolidate the hospitality solutions market over the next few years.
What what is the the opportunity to accelerate revenue beyond that 7% to 9% growth rate you mentioned.
Yeah, Matt Thanks for the questions as Clinton.
We see a lot of opportunity in two primary areas. The area. We're most excited about is the concept of intelligent retailing.
And this is really where we are introducing a new product marketplace that allows for hoteliers to sell products and services beyond the room when the challenges we've had historically in the industry is that we've thought about inventory as being a hotel room.
At a certain rate for length of stay.
And we know that travelers are looking for a much broader set of experiences. So the products and services you can add to that hotel room are the things that hotels, Ken Ken.
Market and sell to their customers and so this drive not only topline revenue in the form of higher conversion higher yield higher share of wallet.
But many of these products and services are very high margin that flow to the bottom line. It also creates a very attractive.
It also creates a very attractive.
Guest experience right. So it's benefiting all parties involved so we see upside there in terms of growth acceleration.
The second thing we see is as we finished the trust migration, we now move onto a single platform. A single platform is a relatively modern tech stack and that tech stack has a set of common services for both the central reservation system as well as for our Pms system. So the single brain. There. It gives us the ability to have single platform type economics, as we grow in the future and delivers many of the benefits you've seen in other platforms. In other tech space is that we think will allow us to compete much more effectively for hotels are looking to have a single source of technology.
Okay. That's that's interesting thanks, and I mean can you specifically quantify the revenue and EBITDA impacts from the I guess, the sort of the two d. migrations.
Now on solutions, you mentioned this quarter and will this impact increase next quarter.
Well, obviously next year is only going to normalize those.
Well that looks at a number.
Yeah, as we measure water. We would've had taught you can do some back we would at 12% revenue growth excluding those the migrations, which obviously were going to come in at very high margins.
Okay.
Thanks very much.
Our next question coming from the line of Jim Snyder with Goldman Sachs. Your line is open.
[laughter].
HM either.
[noise].
Let's go to the next question.
Our next question coming from the line of Ashish Sabadra with Deutsche Bank. Your line is open.
Oh, thanks, Thanks for taking my question.
Sean any color on our discussion with the airlines about potential new Sabresonic went after the event.
Yes.
Ashish good to hear from you.
Okay I'll go back to where we were with when Dave was talking about the things that are taking place with technology and.
We're not going to get into.
Specific campaigns that we're involved in right now, but the suite of products that you know, Dave and team have especially revitalize they're out in the marketplace. You know we are having what I would consider to be encouraging conversations in many regions of the world and as you know this is a long process that takes place. The other thing that continues to.
You know really begin to weigh into the conversations and I mentioned this I think last year and then begin to the plant. The seed is people are really looking at going back to fair logics, what's happening on the distribution side.
There's definitely alignment will work with what's taking place there, but I'll, let Dave I had a couple of comments since he and his team are in the midst of many of these campaigns yeah I would just echo what we've said in some of the comments that were there earlier, which is.
We've been focused on our installed base, we obviously.
The best thing you can do is heavier installed base healthy and satisfied in growing which you're seeing the beginning progress of that starting to show up now as we've talked about.
And then the fact that weve shift from defense to offense.
Competitively, there's a significant renewal cycle ahead of us over the next three years from our competition and the health of the portfolio and I'm very excited about.
Some of the comments and some of the customer feedback that we're seeing as they.
Begin their upgrade journey from our installed base and that just reflects itself as John talked about in conversations that are starting to pop up.
In different regions around the world So pipeline positive activity positive and.
It's one of those things where these are as John said these are I'm learning a lot over the last few years of exactly how challenging some of these transformations.
Inside various airlines around the world are but the team is well engaged and I think we're at a point now where we're very well equipped with differentiation.
The technology transformation cannot be underestimated we are.
The first and number one in cloud based computing in the travel industry. We are the first ones to move to the cloud we have 55% of our compute power there as Sean.
Mentioned and it should be underscored significantly our entire shopping complex in the network globally in the cloud that makes us number one in shopping in the cloud as well so.
A lot of the criticisms maybe the past around our technology footprint. We have made enormous strides over the last two years, there and I'm very very proud of the work. The team has done and continues to do and that puts us in a in a very positive position for these conversations and what we see over the next couple of years as that transition in those those open opportunities for renewal situations are out in the market. Yes. She said another way of looking at it and I think it does go back to.
Why you should focus on what's happening within the Air VISIONAIRE Center portfolio is that that's an indication of what the team has done as it relates to the health of the product in one the advancement of the product. If you look at it relative to why we keep talking about the cloud not only because of what it does for us on a stability basis, a cost basis, but it gives us global distribution and what our global disbursement in that and one of the most important things for customers is that theres not latency there because the latency can have impacts in what's taking place and so you are beginning to see what I would say are the green shoots of really good things that are happening and the lead indicators on that is what's happening with their center and our vision.
As you would assume there's a lot of other work that has been going on behind the scenes.
A big part of it and I think it goes back to the renewal that we announced with Jetblue and some of the things that will be rolling out to them.
But when you look at some of the components that we talked about when I talked about Ethiopian Airlines I talked about.
Aeroflot in some of the products that they are taking these are some of the things that we have invested on the digital commercial platform that comes together as the entire suite of products that we can take to a carrier in essentially present.
And I think you can here just in our voice and how we're feeling about the business.
That we feel like we're in a much better place than where we were two years ago.
This is very helpful. Thanks, a lot and maybe just a quick question any initial thoughts on the have you announced can you give should change in travel I travel books, and then get them going private again very early days, but how could that the combination of that could influence the competitive environment going forward and not much I mean, we know Greg is nice guy he's been around is around say refer a number of years.
I think we like a number of groups are waiting to see what the direction of new ownership and new leadership is going to be.
But as I continue to talk to the team and we look at what we're doing we're running our own race, we feel very good about what we're doing.
The customers are responding to what we're doing in the marketplace. We've seen it as it relates to the share growth.
And the pivot in what's happening relative to where were incentive rates were where were getting new deals and this is really tech focus and we're going to continue to focus on the tech and we believe that saw that that's where the opportunity is and I as I mentioned customers are responding positively.
Thank you. Thank you.
Thanks issues.
Our next question coming from the line of Nils.
With Macquarie Your line is open.
Thank you and congratulations for the quarter.
Just a quick question Im showing early on in your prepared remarks, you referenced.
The fact that you have experience in North America, with having lived through the pricing pressure and deregulation.
The word to deregulation that was that a reference to the airline industry, but was that a specific reference to the GDS industry and I'm thinking here with regards to the current European Commission investigation. It's the nature of the contracts you have with the carriers and if you.
The most favored nation clause within those contracts would you anticipate that that then is the catalyst for an era of pricing pressure within the European GDS market.
Yes Neil.
Pretty pretty broad question, there, but let me let me try to walk through it so when I when I talk about deregulation was deregulation really the GDS industry that happened in the mid two thousands I think it was about 2005 2006 and really what transpired in that is that the GDS is went in they negotiated new agreements with airlines and then in the past or what ended up happening from there as the GDS is negotiated with the travel agencies that had to do an opt in agreement. So there is essentially a step down in fees that took place relative to the fees from airlines and then they commissions to.
Or the incentives paid to the agency community and that's what we talk about that if you look at the U.S. marketplace. It has gone through that change and I'm going to share a couple of numbers with you because I think it's pretty important relative to.
How we see that the north American marketplace, why we feel good about our position here, but if you look at and this ties into because we get a lot of questions to Neil about just what's happening on the capacity growth side of the equation. So if you look at the North American marketplace.
North American capacity is going to be full service carriers as well as low cost carrier so in total.
In 2018 capacity growth is right around 5% and you had GDS growth was at 3.9% and we always look at that gap what is that gap because you're going to have specifically with growth of low cost carriers are growing at a higher rate they have a higher propensity.
Direct bookings so that gap was about 1.1% when you look at 2018.
What's interesting when we look at the first half of 2019 is that capacity has slowed down as we know in many places around the world at 3.3%, but GDS bookings grew at 2.8%. So that gap was actually a half a point and what that tells me is really the strong GDS marketplace.
In North America, and I think it goes back to some of the changes that have taken place over time.
When I look at the European marketplace.
Part of what we're seeing I think this goes into.
What what AG Air, France, KLM as well as a positive and focused on is.
One the competitive environment, there the cost of distribution and as we've had conversations.
With all three of those.
Groups, that's a big part of what they're focused on and in doing that I think.
Well as you see the model evolving and then it goes back to why when we look at not just the old way that we have sold and help sell or create offers but it's the new way as well and I think thats the pressure that youre seeing definitely in the European marketplace.
And again, we'd walk walk you through why were being less impacted but I continue to see that marketplace evolving over the next several years.
Okay. Thanks very much.
Our next question coming from the line of Jed Kelly with Oppenheimer. Your line is open.
Great. Thanks for taking my question.
Just on travel network's margins.
On your presentation I think it said.
Excluding the accelerating technology expense recognition they would have been down only like 180 basis points.
How much of that is related to depreciation reverses.
Instead and incentives moderating.
And then on your comments on Tech travel network margins expanding in 2021.
What what type of macro environment does that assume I mean can they still expand we are later in the cycle how does their mark margins work in a potential recession here.
Sure, Yes, so what's wrong with regards the comments what I was trying to do with regards to the what would happen. If we had had the same capitalization mix. That's what I was trying to do and I gave you that the the reason why the margins were down even excluding the capitalization mix in Q2 would have been the fact that as I've mentioned in my opening remarks, the average booking fees dropped 60 basis points and there was even though even though it was really nice to see the growth in incentive fee come way down that still would impact your margins. That's what drove the margin depression, even excluding the capex and expertise in in the second quarter as we move forward.
And when we got into that into the out years. It will be nice to see will eventually get to the point to where the growth in average booking fee begins to almost normalize and equal what's going to happen with incentive fee and then you'll get leverage coming out of your tech spend because as tech spend grows only 1%.
And the topline is growing call. It four to five plus percent, you'll get margin expansion and that will be really pretty much in any economic cycle.
Okay. Thanks for that.
And then just on the comments earlier on.
Contracts up from a legacy competitor.
I mean can you just discuss your strategy I know you can probably give a little you probably aren't going to give us too much but just.
Competing against a competitor that's been entrenched with those carriers for for quite some time and then another question I have just Sean.
Expedia and lift Lattanzi did announce a direct connect and DC contracts. So can you just give us your views on that announcement.
Yes, let me just take the first part of your question there.
You're right, we're not going to give you specific color, but what I would just go back to is what we're focused on and as John said, we're playing to our strength and our game, which is strengthening the portfolio.
Leading indicator of that as he said is the retailing distribution space is continuing to grow change in morph and Airvision and Air Centre, a very significant part of how we differentiate that and so when you see the growth strength of carriers picking those pieces up it just speaks to the interest level in moving and evolving the way a passenger service system.
Is looked at and the way in which customers are looking at the market and held data and analytics play a significant part in kind of how they think about that retailing journey going forward and we're going to continue to focus on that area, where we can continue to differentiate our shopping are going to continue to differentiate.
Our pricing and the optimization of how we're injecting machine learning into that capability said. So those are just things that we're going to continue to showcase and continue to try to drive forward and beyond that we'll we'll try to continue to keep the customer base as happy as possible because nothing like a good reference base to support the situation that we're in.
Thanks, Dave and jet on your second question as it relates to Lufthansa and Expedia listen I think this is part of what we're seeing in the European marketplace is that.
And we've seen this over several years just different airlines thinking about their distribution strategy and how do they essentially.
Go to the marketplace and with that I think we're going to continue to see it we have a united negotiating with Expedia right now.
I think a big part of that negotiation has to do with and I think United has been vocal about this on how their products are being sold through Expedia.
And it really does get into their basic economy, but it's one that I think you're going to continue to see airlines try to press ways going back to how are they lower in their distribution cost that they are selling and if you look at the tickets that are sold.
Through an expedia and a lot of cases OTI age to be low yielding to tickets. So they are trying to find lower cost of distribution to be able to do that so I think thats part of it.
The other thing that I.
I, often caution airlines with when I speak with them is the more complicated you want to make your product offering and it doesn't matter, which through which distribution outlet.
You have to be very careful that the normalization that is taking place and again it sort of goes back to what we're focused on is that listen if you want to have a.
A strategy thats going through the indirect channel direct channel or even direct connect.
We have to make sure that we have technology that supports it and in doing that is why we're when we look at our broad portfolio. It's just not about distribution, but it does drive back into what.
The airline solutions team is doing on the PSS and how do you think about that offer creation and then how do you think about the forms of distribution and how do you fulfill that and that's what I continue to try to educate.
My team on the Street on is you got to look at this entire picture just not pieces of the picture and what's taking place and Thats the strategy that we're executing to.
Thank you.
And as a reminder, ladies and gentlemen does a question. Please press the Star then the one key on your Touchtone telephone.
Our next question coming from the line of Jim Snyder with Goldman Sachs. Your line is now open.
Good morning, Thanks for taking my question apologies for the difficulty before just one follow up on the earlier question to start off in terms of some of the types of clients that might be most vulnerable to compare to take away by sabre.
What would that be.
Should we think about that as being some of the legacy navitaire contract holders as being maybe.
Most.
The biggest potential opportunity and and if you just kind of think forward when what you expect to see some announcements on on some of these airline solutions wins.
Materialize is that something we can expect in the back half of this year or more 2020 event. Thank you yes, yes.
Thanks, Jim and thanks for making our way back up.
So we don't comment as you know on where we are deals where land. If you find it and I think it was a combination of opportunities that are out there.
There are some that and I think we find this in any business that there are carriers that have been on.
What I would consider to be the larger platform for a period of time that are looking for different solutions.
You spoke about the Navisphere platform and there are carriers around the world.
That have grown to a size and if you look at in some cases, the investment structures and who their investors are.
And you have essentially looking for the capability of a broader network that gets into inner lining and code shares it opens up a different opportunity there and what I mean by that is.
When you look at the what I would consider to be the full capabilities of sabre Sonic and even our competitors PSS on the on the higher end.
It has capabilities to fulfill that Navios here I don't believe has all those capabilities. So you have customers that are looking at change, while if you're going to make a change off of the NAV it off of NAV a tear.
It's really a transition I don't care, if it's a transition to sabre sonic it'd be a transition to.
Different portfolio, so when we look at it.
Theres sort of a combination of different opportunities that we see out there.
That's helpful. Thanks.
And then just a clarification you raising the.
The airline solutions guidance on the Airvision and Air Center strength that you saw.
Just wanted to understand if you think that level of growth is sustainable over the next three quarters as well or if there was any kind of onetime impact in those numbers right now.
Well look there was there was some obviously some benefit this quarter to local installs, but the new accounting treatment that benefited this quarter. That's why I gave the guidance of what we thought revenue would be in airline solutions for the next two quarters. So I really focused on those two quarters I think what I didn't go out of the way, obviously Q1 of 2020.
Understand thanks very much.
With that I would like to turn the call back over to Mr.. Thank you for closing remarks, great. Once again once again I want to thank everybody for joining us. This morning, we continue to appreciate the interest and support and look forward to continuing to share the progress that we have going on at Sabre hope everybody has a great day. Thank you.
Okay.
Ladies and gentlemen, thank you for your participation in today's conference.
This does conclude the program you may all disconnect good day.