Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Sabre Holdings Corporation (TSG)

Q3 2006 Earnings Call

November 2, 2006 10:00 am ET

Executives

Sam Gilliland - Chairman, President, CEO

Jeff Jackson - CFO, EVP, Treasurer

Tom Klein - Group President of the Sabre Travel Network and Sabre Airline Solutions, EVP of Sabre Inc.

Michelle Peluso - President, CEO, EVP

Karen Fugate - VP, IR

Analysts

Robert Peck - Bear Stearns

Justin Post - Merrill Lynch

Chris Gutek - Morgan Stanley

Jake Fuller - Thomas Weisel Partners

Michael Dimler - UBS

Presentation

Operator

Good morning. Welcome to Sabre Holdings announcing their Third Quarter 2006 Earnings Conference Call. At this point we do have all of your phone lines muted or in a listen-only mode; however, after the executive team's presentation today there will be opportunities for your questions. (Operator Instructions).

As a reminder, today call is being recorded for replay purposes, that information will be announced at the conclusion of this quarter's earnings release.

So with that being said we'll get right to today's agenda. Here with our opening remarks is Sabre Incorporated Vice President of Investor Relations, Ms. Karen Fugate. Please go ahead, ma'am.

Karen Fugate

Hello, everyone, thank you for joining us. I'm here with Sam Gilliland, our CEO; Jeff Jackson, our Chief Financial Officer; Tom Klein, President of our Travel Network and Airline Solutions Businesses; and Michelle Peluso, CEO of Travelocity.

Before we get started I would like to remind all of you that some of our comments on matters such as our forecasted revenues, earnings, transactions, operating margins and cash flow, contracts or business and trend information would constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ materially from our expectations. Those factors are described in the risk factors section of the company's most recent Form 10-K filing with the SEC. The company undertakes no obligation to publicly update or revise forward-looking statements. We have provided a detailed explanation and reconciliations of our adjusting items and non-GAAP financial measures in our earnings press release and on our website.

Now I'll turn the call over to Sam.

Sam Gilliland

Thanks, Karen. Good morning and thank you for joining us. Today I'll quickly give you an overview of the company's performance for the quarter, seeing excellent growth in both operating income and operating margin and exceeding the top end of our projections for earnings per share.

Now let's take a look at each of our businesses beginning with Travelocity. Travelocity excelled this quarter on key tenets for the business; operating margin improvement and product differentiation. In both North America and Europe we had significant year-over-year EBITDA and margin improvement, and while we did experience softness in packaging revenue in the second and third quarters, we've seen booking trends improve nicely over the last 60 days. In Europe, although we've felt the effects of the foiled terrorist attack, we were encouraged to see the lastminute.com brand grow its gross sales 27% in the month of September.

We continue to differentiate and expand our brand proposition. We rolled out our customer loyalty program, giving our most loyal patrons immediate access to a tremendous range of benefits including the introduction of our co-branded credit card. Further extending our brand, we launched 'Travel for Good' our multifaceted initiative that aims to connect leisure travelers with volunteer opportunities around the world. On the corporate travel front, Travelocity Business saw success with significant transaction volume added by Lockheed Martin.

Cost discipline in areas like marketing and operating improvements in customer service played an important role in making this Travelocity's most profitable quarter to date. The integration of lastminute.com is progressing well overall. Lastminute.com hotels were added to Travelocity in the US and we are now processing roughly 20% of lastminute.com's air bookings through the Sabre GDS, well ahead of our schedule. And while there have been additional integration costs for new initiatives, we are pleased by the progress our European team is making and especially encouraged with the progress made toward becoming Sarbanes-Oxley compliant by year-end.

Turning to our Travel Network Business; in the third quarter we launched our Efficient Access Solution. Now nearly 100% of Sabre connected agencies in North America participate in the program giving them access to full travel content and other important benefits. We also finalized our five-year full content agreement with American Airlines making it the eighth US carrier to join EAS. The long-term agreements with EAS participating carriers represent close to 60% of our airline bookings worldwide. These agreements underscore the value Sabre's efficient travel marketplace provides airlines as does the five-year full content agreement we signed last quarter with JetBlue.

Also in the third quarter we began introducing comprehensive suites of products and services tailored to meet the unique needs of our corporate and leisure agency customers. In the online segment, Travel Network has been pleased with the volume of bookings coming from Expedia and Priceline. With the addition of these transactions we continue to see our overall US bookings share strengthen.

We also made progress in our non-air and merchandising revenues. Our innovative marketing programs like Sabre Surround, Hotel Spotlight and promo spots continue to grow in popularity with hotels. Hotel merchandising revenues have grown approximately 40% year-over-year, now accounting for 23% of total travel network hotel revenues. And behind the scenes Travel Network continued its operational discipline, lowering costs across the business. In fact, we've eliminated more than $350 million in expenses over the past several years, obviously a necessity given the revenue reductions in our airline business. And there's still more than needs to be done so we will continue to focus on cost management over the long-term.

And at our Airline Solutions Business we saw our most profitable quarter ever as well as strong revenue growth. It was also our second-best sales quarter ever as we continue to grow our global footprint. Air China recently became the third major carrier in China to adopt our Systems' Operations Control Solution, a technology that is helping to reshape the airline business in China through its state-of-the-art solutions for flight operations. And we successfully completed the migration of India's fastest-growing carrier, Kingfisher Airlines, to the SabreSonic suite of products.

Quarter after quarter the team at Airline Solutions has continued to improve the business in a challenging environment, turning what had been a highly customized resource intensive business several years ago into a standard offering in which recurring revenues now represent approximately 75% of the business. We really haven't shined the spotlight on the Airline Solutions Business over the past few years, so I wanted to take this opportunity to recognize their ongoing improvements and contributions to the business.

The progress from each of our businesses resulted in an excellent quarter for Sabre as a whole including solid operating performance and EBITDA growth. We're looking forward to opportunities in 2007 to deliver new products and services, strengthen our presence in Europe and Asia Pacific, and further diversify our revenue mix. Tom and Michelle will join us in a few minutes for Q&A, but first let's go to Jeff for the detailed financials.

Jeff Jackson

Thank you, Sam. This morning I'll cover our third-quarter results for total Company in each business unit and turn to outlook for the fourth quarter. We delivered strong third-quarter results with each of our business units operating well and driving significant margin and earnings improvement for the Company. Total Company revenue for the quarter was $746 million, 7% higher than last year, attributable to growth at Travelocity and Airline Solutions. Total Company operating income on an adjusted basis was $145 million; growth of 30% and a margin of 19%. GAAP operating income was $120 million, 20% growth from a year ago quarter with a healthy margin of 16%.

Earnings per share on an adjusted basis grew 29% to reach $0.64 and GAAP earnings per share were $0.52; year-over-year growth of 15%. Free cash flow for the quarter was $50 million compared to $62 million in the year ago quarter. Cash flow from operations was $79 million compared to $84 million in the third quarter of 2005. As expected, free cash flow was lower than last year primarily due to a year-over-year difference in the timing of supplier payments and increasing capital expenditures. At quarter end cash and marketable securities stood at $520 million, debt at $1.1 billion and net debt at $613 million.

Turning to business unit results, I will cover key highlights and metrics for each business. All reported financial and operating metrics are provided in the earnings release and reconciliation schedules. I'll start with Travelocity and, before I get to the financials, I want to highlight a few items. First, we consolidated our online travel community business IgoUgo into Travelocity. IgoUgo formerly reported as an emerging business within Sabre Travel Network. IgoUgo is still relatively small, but is a great addition to Travelocity's end-to-end consumer offering. The consolidation will negatively impact Travelocity full-year operating earnings by approximately $5 million. Second, I wanted to remind you that the -- that on July 20th we marked the one year anniversary of the acquisition of lastminute.com. The year-over-year financial results I'm about to review for Travelocity Europe exclude the first 19 days of July 2005 for lastminute.com, which coincides with the peak European travel period. Going forward our quarter results for Travelocity Europe will be directly comparable year-over-year.

Global Travelocity had another impressive operating quarter resulting in unprecedented operating margin and adjusted EBITDA. Travelocity gross travel booked for the quarter reached $2.5 billion, growth of 18%. North America, which includes Zuji, was $1.8 billion, growth of 13%. Europe gross travel booked was $734 million, growth of 33%. Although this growth rate is admirable, gross travel booked in Europe was negatively impacted by the foiled terrorist attack and the World Cup this summer. But the good news is booking growth rates, as Sam mentioned, have improved since September.

Travelocity global revenue totaled $321 million, overall growth of 16%. Europe revenue was $140 million, growth of 31%, and revenue from North America grew 7% to $181 million. Total global transaction revenue grew 15%, driven by 18% growth in non-air transaction revenue. Travelocity grew operating income by 40%, reaching $57 million on an adjusted basis with an impressive operating margin of 18%, growth of 3 points over last year. On a GAAP basis operating income was $41 million with an operating margin of 13%.

North America had adjusted operating income of $31 million, growth of 21% over last year, and a strong margin of 17%. On a GAAP basis operating income was $26 million with a 14% margin. Europe had adjusted operating income of $27 million, year-over-year growth of $11 million or 72%. Operating margin reached 19%. This operating income growth would have been higher without $4 million of integration costs. On a GAAP basis operating income more than doubled to reach $15 million for an 11% margin.

Travelocity's total adjusted EBITDA grew 37% to reach $67 million. North America was $36 million, an EBITDA margin of 20%. And Europe adjusted EBITDA was $31 million, an EBITDA margin of 22%. Before I move on, I'd like to recap what we said on our October 12th webcast about integration activities at lastminute.com. We are confident that we'll complete the majority of our integration efforts by the close of 2007. With these costs tapering off we expect to see approximately $25 million go straight to the bottom line in 2008. Additionally, as you would expect, these efforts will produce additional benefits in the cost structure in 2008 and beyond.

Now I'll turn to Travel Network Business. For the quarter revenue was $398 million, a year-over-year decline of 1% with total transaction growth of 2%, both in line with our expectations. Growth in online consumer transactions was 15% driven by the addition of Site59, lastminute.com, Expedia, Priceline and organic growth at Travelocity. On the cost side total expenses were down more than 4% over last year, chiefly due to reductions in data processing and overhead costs. These cost improvements led to strong bottom-line results of operating income for the quarter of $75 million on an adjusted basis and a margin of 19%. On a GAAP basis operating income was $67 million with a margin of 17%. Adjusted EBITDA was $88 million, 23% growth over last year with an EBITDA margin of 22%.

We had a great quarter at Airline Solutions driven by strong performance in the Passenger Solutions and the products and services businesses. Revenue was $72 million, solid growth of 7%. Adjusted operating income was $14 million for a 19% margin. And GAAP operating income was $12 million for a margin of 17%. Adjusted EBITDA was $18 million, margin of 26%.

Now turning to outlook; as a reminder, on our October 12th webcast, we provided an update of Travelocity Europe guidance. We said for the year, we expect a slight operating loss on an adjusted basis which represents an improvement of $25 million over last year. On a GAAP basis we expect an operating loss of approximately $55 million and adjusted EBITDA of approximately $10 million. We've updated total Travelocity full-year guidance to reflect this change. We now expect total Travelocity to end the year with adjusted operating income of $80 million to $85 million, GAAP operating income of $12 million to $17 million, and adjusted EBITDA of approximately $120 million.

For overall Sabre Holdings we remain on track to reach our fourth-quarter and full-year projections. To reiterate fourth quarter, we expect total company revenue to be in the range of $650 million to $680 million with adjusted earnings per share of $0.42 to $0.46 and with GAAP EPS in the range of $0.29 to $0.33. For the full year we expect adjusted earnings per share of greater than $1.70, GAAP EPS of greater than $1.12. We do, however, expect to well exceed the bottom end of this guidance.

Revenue for the year is expected to approach $3 billion, free cash flow is expected to be greater than $300 million with operating cash flow exceeding $425 million; however we anticipate being closer to the bottom end of this cash flow due to the lower than projected working capital benefit as a result of softness in North America packaging and Travelocity sales during the second quarter and early in the third quarter. And with that let's turn to q-&-a.

Question-and-Answer Session

Operator

Indeed, we thank you very much for your time in that presentation today gentlemen. We do appreciate that. (Operator Instructions). Representing Bear Stearns, for our first question, we go to the line of Robert Peck, please go ahead.

Robert Peck - Bear Stearns

Hi everybody. Congratulations. I have a couple of quick questions, probably more for Michelle. Michele, could you tell us a little bit about the last-minute integration and maybe give us any sort of insight, any hiccups you've had so far through the year of things that were unexpected? Number two, could you also talk a little bit about the pressure from the tour operators and how you saw that during the quarter and where that's trending. And lastly, could you give us a little bit of color of your competition versus the other agencies, say Expedia, and what you think the VIP program can do for you? Thanks.

Michelle Peluso

Absolutely Robert; okay, so, first on lastminute integration. I think the integration is proceeding well. The areas where I think it's taking us a bit longer and have been a bit more challenging maybe are particularly in the financial integration. As we've mentioned, Sarbanes-Oxley compliance will cost us more than we had anticipated. And the plus side of it is of course we are doing some things ahead of schedule; for instance moving air bookings to Sabre ahead of the deal model. But overall I think proceeding nicely. Jeff mentioned this, but we expect about $25 million in integration costs to fall off as we get through 2007, so that will be a nice benefit to the P&L.

In terms of competition from core operators, our business in Europe does have -- we actually do sell tour operator products on our site through our holiday pass. And we have certainly seen that business be flat to declining over the course of the year. I think that's consistent with what the overall tour operator business looks like in Europe. For us the key imperative is to continue to grow our dynamic packaging product which is really our own home-grown packaging solution; to grow that faster. We have seen strong evidence of fast growth in dynamic packaging over the course of the year.

Our fundamental value proposition to consumers is quite different than tour operators. We're certainly full-service in terms of stand-alone air and hotel. In Europe we have a lifestyle business as well and we have to continue that path of differentiation.

And then finally, in terms of competition, and I think you also mentioned VIP and loyalty; we continue to feel pretty strongly about the gains we've seen versus our competitors in North America and particularly around some of the things we've been doing on the marketing front, and customer championship. We think that has been amongst the drivers of some of the share gain we've seen over the past couple of years. The VIP program for us is a way to further cement loyalty with our most -- the greatest users of Travelocity and we're really carefully targeting the way the program operates both to reward our customers, but then, as importantly, to shift them towards higher yielding sales like total trip and hotels and the like. And so, it's a pretty carefully crafted program to further increase the loyalty of our most frequent users.

Robert Peck - Bear Stearns

Thanks, Michelle.

Michelle Peluso

Sure.

Operator

And next we will go to the line of Justin Post representing Merrill Lynch. Please go ahead.

Justin Post - Merrill Lynch

Hi, congratulations on getting the STN deals done. Can you talk about the pricing? We've heard some things in the press that over time there might be some more pricing declines with the airlines. Can you give us any color on that? I know you can't talk specifically about any individual; can you tell us in general how that's going to trend going forward? And then secondly, on Europe Travelocity, what was the organic growth rate? Can you tell us what that is for the whole business and how do you see that trending going forward given the product mix you have there?

Michelle Peluso

Do you guys want to take it and then I'll chime in on Europe.

Sam Gilliland

Yes. Why don't I talk to the deal pricing first off? I guess for us in terms of any visibility into that, it will really come through the long-term operating results of the Travel Network business. So, we've said that we expect consistent margins in that business, mid to upper teens. I think you've seen evidence of that here even in this quarter as we've begun -- as we've implemented those contracts. Now, that's about all the visibility that we'll provide. We will likely provide some cash flow visibility as well as we get a little further perhaps into the year or early next year provide some cash flow visibility. But we won't get into specific pricing for any of the airlines. Now the -- so, it's really going to be about long-term cash flows and meeting the commitment that we've set forth on maintaining margins in the travel network business.

The other thing I would say is that that is about long-term cost management as well. And so while we have I think done a really -- I think Tom and his team have done a really good job of managing the cost structure, improving that and in fact taking data processing unit costs down pretty significantly here over time. We're going to have to keep doing that, we're going to have to continue our focus on incentives, and certainly some of that within the structure of the EAS program, but more broadly over the next several years; and then last, ensuring that we have the right productivity improvements in that business over a period of time. So, we're clearly not done, but I do think that our financial results and even what we've laid out for the next three years as we model it internally ourselves, we feel very good about the commitments we've made of maintaining the mid to high teens margins in that business.

Michelle Peluso

And on the European side, if you pro forma organic growth sales for Europe, it's roughly flat and slightly better than that in terms of revenue growth. And that is the result of the World Cup, the foiled terrorist attacks and also the fact that we've exited business over the course of the year. And as you mentioned, Justin, we have a mix of off-line and on-line in Europe. And then I think even in this environment the good news is that the online businesses performed reasonably well with lastminute.com for instance growing at north of 15% over the quarter.

And I think even better news; we've seen signs of nice rebound here in September and beyond. So, as Sam mentioned with lastminute.com growth at what I just mentioned was 15, that growing to North of 27% here in the September month. Going forward, we expect that growth rates will be combined in the 10% to 15% range and that is a combination of our expectation that the online businesses will grow north of 20% and our off-line businesses, which are about half of the portfolio, will be in the single digits.

Justin Post - Merrill Lynch

Great, I appreciate that detail. A couple quick follow-ups on results in the quarter; it looks like the intersegment eliminations was $45 million, that was actually down from last year. Any thoughts on what piece of that is related to the GDS business for Travelocity, the incentives there? And the second thing, the non-air bookings for the GDS or STN business were actually down a little bit year-over-year. It was my impression that was growing nicely. Was there any one-time effect there or am I just not looking at that right?

Michelle Peluso

Just on the North America Travelocity side, what I can say is incentives represented were kind of in the mid teens. North America revenue for Travelocity, we expect that now going forward to be in the low double-digits.

Jeff Jackson

The only thing I would say to augment that is that we've said several times I think this year that Travelocity participated in the opt-in program and so that was relevant in that expense line.

Sam Gilliland

And on the question on non-air in the GDS, the non-air business is strong from a standpoint of we are selling a broader mix of services to suppliers. So on the hotel side for example there's more money being shifted into the marketing services like hotel upsell and cross sell and Sabre Spotlight and we highlighted some of that in Jeff's comments. But the transactions are -- for hotel they're in the flat range and then in some of the other non-air sectors they're slightly down. But our overall revenue mix is up.

Justin Post - Merrill Lynch

Great. I appreciate that and a nice job on the STN margins.

Operator

And thank you very much Mr. Post. (Operator Instructions). And next we go the line of Chris Gutek with Morgan Stanley. Please go ahead sir.

Chris Gutek - Morgan Stanley

Thanks, good morning.

Sam Gilliland

Hi Chris.

Jeff Jackson

Hi Chris.

Chris Gutek - Morgan Stanley

A couple of questions, first starting with you if you can; in terms of disclosure policy, and I certainly understand that if some of the airlines have somewhat different terms from the average deal terms you're reluctant to let some airlines know they might have less than average attractiveness of their economics. But I do recall a couple conference call ago you saying that at some point in the future when all these deals were in place you would talk more explicitly about the deal terms and now you seem to have changed your mind. Can you just explain what the strategy is behind the limited disclosure on these GDS deal terms?

Sam Gilliland

Yes, I think going back several quarters what I had said was I might talk at an aggregate level about the airline business model [with headed]. And I'm not ready to do that yet. I think there will be a point in time when we feel good about the deals we have in place on a global basis when we'll talk and, again, it would be on an aggregate basis. These are confidential deals and we expect our airline customers to keep them confidential and they expect us to keep them confidential. So we wouldn't talk about any of the specifics, but I think you may get a little bit more from us over time in terms of the aggregate and that's what I committed perhaps several quarters ago.

Tom Klein

Sam, can I add, in the marketplace and in our broader releases we've certainly talked in more explicit terms about terms and price is just one term. So we've been very -- as Sam noted, our policy on discussing price has been do not discuss it, but as it relates to the broader terms in the broader guarantees that we have for our trouble agency customers, we've been pretty explicit on that in the marketplace. And on the pricing in general, we've said that we have -- a large portion of our revenue will be stable going forward. And that we have a blend of pricing that includes outside US as well as non-air where we think there's opportunity to see some slight up-ticks in price. So, on a blended basis we feel that we have a pretty good stable base of revenue for the next several years.

Chris Gutek - Morgan Stanley

Just one follow-up on that; have you said what the magnitude of cost savings are that you'll need to pursue from a cost reduction perspective to offset these deal term changes and then over what time frame you'd expect to achieve those savings?

Jeff Jackson

No, Chris, we haven't. I think as we start to get into next year and talk more about our guidance for 2007 that's one of the things that Karen and I and our colleagues are considering spending some more time on is specific cost savings initiatives and quantifying them in a couple of different categories to help you see deeper into the business. But that's something that we'll get to as we get into 2007.

Sam Gilliland

Yes and even where we might see incentives going over time.

Chris Gutek - Morgan Stanley

Right. Okay, great. A couple more quick ones on the quarter itself; so, the year-over-year acceleration and growth in gross bookings at the travel network business, Q2 was 4% growth and Q3, Jeff, you mentioned 15% growth. Should we assume substantially all of that acceleration is Expedia and Priceline?

Jeff Jackson

No, you shouldn't. Start processing Site59, lastminute.com, Priceline and Expedia. So there are four or five important customers in that mix.

Chris Gutek - Morgan Stanley

Okay. And then finally for Michelle, I guess a two-part question. What is the pro forma or organic growth for Travelocity Europe?

Michelle Peluso

I think I just hit that when Robert asked, but it was roughly flat, mix of off-line and online with online growing -- the lastminute.com brand for instance growing north of 15% and off-line declining in part due to the exiting of several businesses.

Chris Gutek - Morgan Stanley

Okay. And then the second part is for Travelocity North America the gross bookings were down a bit sequentially and I think the historical pattern of seasonality was relatively stable Q2 to Q3. Any comment?

Michelle Peluso

Sure. I think in North America there were a few things going on in the quarter, and this was true of the second quarter as well. Of course we saw that the packaging softness, as we mentioned, with both TotalTrip and Site59, and that's largely a result of we went through a period this summer with extremely high load factors and so just less air being made available for package sales. Now the good news is we have seen that rebound here in the past 60-days and so we do expect growth will be higher in future quarters. And then secondly, we have taken -- our aerials have come down over the course of the year as we've negotiated our carrier agreement pan Sabre kind of long-term deals. So those are the main drivers and you come to a bit of softness on the gross sales and revenue side. But again, we do expect to see growth rebound here again in future quarters.

Chris Gutek - Morgan Stanley

Great, thanks.

Operator

And thank you very much sir. And Jake Fuller with Thomas Weisel Partners has our next question, please go ahead sir.

Jake Fuller - Thomas Weisel Partners

Hi, guys, a couple of things. On the GDS side of the business margins were particularly strong. Can you give us a sense of the breakdown, how much of that strength was reduction in incentive fees, how much of that was other sort of cost savings and what should we expect of that to be maintained going forward?

Jeff Jackson

I guess the question is sort of how much of the margin growth was driven by the blend of incentives and other cost savings. We haven't broken that out, I would say that there's a bunch of things going on this quarter. One of them, let's not forget, is the seasonal strength of the quarter itself, and that drives -- we've guided to mid-teens margins that is a significant factor in it being above that. In an addition to the opt-in savings and ongoing cost savings initiatives, we can probably -- I think -- as I think about it, Jake, I think my response will be or is that with some of this breakdown between the blend of cost savings from incentives and other cost savings activities which really hit a variety of categories.

We mentioned in the remarks about data processing costs, we're starting to see some real attractive cost savings there as some of the investments we've made over the last several years are starting to come to fruition. And as we think about 2007 and 2008 we expect that to be even more relevant and that's a big bucket of cost data. So, overhead costs continue to -- we continue to manage those either down or hold those flat across the corporate aspects of the business and in the business units. And then the last category of course is service costs, help desk kinds of activities, and again, there it's been a very positive story and we expect that to be able to continue over the next two or three years as well. So, I think what I'll leave you with is just an expectation that we'll do more of this quantification by category as we get into 2007 to give you a sense, but it's really all over the place.

Tom Klein

Jeff, just to be clear, the Efficient Access Solution start date was September 1?

Jake Fuller - Thomas Weisel Partners

Okay. And you may not be able to do this, but in the past you've said what your blended average incentive fee was per segment. Can you give us a sense of has that changed? Is it actually down on a blended average basis, not just the new contracted piece, but the whole -- the total? And you mentioned things like data processing and costs like that, what in the absolute are those so we can get a sense of what the scale of savings might be, on a per segment basis for example, what do processing costs run at?

Jeff Jackson

One of the things to maybe remind you of or shed some light on the incentive side -- and again, I think as we get into 2007 where things start to stabilize a bit in these cost lines where you see sort of steady declines in costs on all these categories and the steady revenue that Tom talked about is a better time to talk about it. But we did add a significant amount of new volume from new online customers and naturally those are coming at -- so those are adding a new base of incentives on top of the growth rate. So there's that factor going on that probably masks a little bit of the incentive decline that you would otherwise see.

Jake Fuller - Thomas Weisel Partners

A blended average up or down?

Sam Gilliland

The blended average now is down, it's not down for the quarter as we started September 1st.

Jake Fuller - Thomas Weisel Partners

Okay. And then transaction processing, can you give any sense of what that might be on sort of a per segment basis?

Jeff Jackson

Again that's the kind of thing that we'll talk more about in 2007. We've seen small declines, small single-digit percentage declines on a year-over-year basis in the data processing costs. I expect that general trend to continue until we're at the end of the conversion of our shopping and pricing engine across all of our customers. And then I would see a more significant decline and that's probably six months to a year from now from occurring.

Jake Fuller - Thomas Weisel Partners

Thank you.

Operator

UBS's Michael Dimler has our next question, please go ahead sir.

Michael Dimler - UBS

Good morning and thank you. I just was curious to get a little more detail on the packaging trends. You had mentioned that things were coming back a little bit on the air side. I wonder if you could shed a little more color on the hotel side and if you could differentiate between trends in the US and Europe that would be helpful.

Michelle Peluso

Absolutely; so, packaging on the air side, as I said, we are seeing more availability and that is helping to drive growth here in September and October. On the hotel side I actually think we had strong availability throughout the summer and here even into the fall. So, the softness in packaging was really a result of not having robust air content and particularly boat content. The distinction between the US business and the European business, Europe we really have two kinds of packaging businesses and they have quite different dynamics. The first is our holiday business that I mentioned earlier and that's where we resell other tour provider holidays so those are kind of static packages, packed by other parties, and that business has been flat to declining all year as I think it has been that way across the market in Europe. The flip side is our dynamic packaging business -- which is very similar to the business we have in the U.S. called TotalTrip -- that continues to see really strong growth even in Europe as well. So we didn't see the same kind of bulk in our ability challenges in Europe that we saw in North America. Does that get to it, Michael?

Michael Dimler - UBS

Yes, I think it does. What's your expectation going into '07? If you could add any color on your economic assessment or anything else that might be affecting your guidance.

Michelle Peluso

Are you asking about lastminute.com in particular?

Michael Dimler - UBS

Just in general, but specifically relating to the packaging business.

Michelle Peluso

Sure. Well, let me take packaging and then maybe, Jeff, you can talk to it more broadly. Of course we haven't given our 2007 guidance yet, but I would say that we certainly -- in packaging overall there are periods of seasonality and we've seen this over several years where there are high load factors and hence less availability there to sell-through packaging and that tends to be a seasonal phenomenon. So when it happens over time more capacity is added and/or demand drops and we start to see more air availability and more bulks added back into the system at bigger discounts. And so I think we've seen the worst of it here in terms of this past summer. We've certainly seen encouraging signs over the past 60 days of packaging growth rebound and I expect we'll be back in growth here in subsequent quarters.

Jeff Jackson

It's important to note, load factors for the airlines were running in the kind of low 80's which is an extremely high load factor and we've been seeing that now come down to kind of mid 70's or a little above. So that then typically means that we see improvements in the packaging business.

Michelle Peluso

And even in the summer months we were seeing load factors even starting to approach 90% for a month or two there. So very different year-over-year and clearly very different this summer than what we're seeing now in the fall.

Michael Dimler - UBS

Great, thank you.

Operator

(Operator Instructions). Mr. Gilliland and our host panel, there are no further questions. I'll turn the call back to you for any closing remarks.

Sam Gilliland

Excellent. I appreciate your participation on the call and we look forward to spending more time with you over the next several months. Have a good rest of the day. Goodbye.

Operator

And ladies and gentlemen, Mr. Gilliland is making today's conference available for digitized replay for two full weeks starting at 12:30 PM Central Standard Time November 2nd all the way through 11:59 PM November 16th. To access AT&T's executive replay service please dial 800-475-6701; at the voice prompt enter today's conference ID 845-776. Internationally please dial 320-365-3844 again with the conference ID of 845-776. And that does conclude Sabre Holdings' announcement for this third quarter 2006. Thank you very much for your participation as well as for using AT&T's executive teleconference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sabre Holdings Q3 2006 Earnings Call Transcript
This Transcript
All Transcripts