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Sabre Holdings Corporation (TSG)

Q4 2006 Earnings Call

February 01, 2006 10:00 am ET

Executives

Sam Gilliland - Chairman, President & CEO

Karen Fugate - Investor Relations

Jeff Jackson - CFO, EVP & Treasurer

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sabre Holdings fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Chairman and Chief Executive Officer, Mr. Sam Gilliland. Please go ahead.

Sam Gilliland

Good morning. Actually Karen will do the introduction here. So I'll introduce you to -- and hand it over to Karen Fugate.

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Karen Fugate

I know all of you would hate to miss this. So anyway, I'd just like to say hello and thank you for joining us today. I am here with Sam Gilliland, our CEO; and Jeff Jackson, our Chief Financial Officer. Sam will review highlights for the year and Jeff will review our financial results. As a reminder, we will not have a question-and-answer session.

Before we get started, I would like to remind all of you that some of our comments on matters such as our forecast of revenues, earnings, transactions, operating margins and cash flow, contracts or business and trends 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 any forward-looking statements.

We have provided a detailed explanation and reconciliations of our adjusted items in non-GAAP financial measures in our earnings press release and on our website. Regarding the pending merger with TPG and Silver Lake, we filed a preliminary proxy with the SEC on January 16th, 2007, which contains detailed information relating to the pending merger. We suggest that review of the preliminary proxy statement and a definitive proxy statement when it becomes available.

Now, I'll turn the call over to Sam.

Sam Gilliland

All right. Good morning again, everyone. Thanks for joining us. I am pleased to say that we successfully executed on the financial and strategic plans we laid out at the beginning of 2006, and this morning announced double-digit growth in revenue, earnings and adjusted EBITDA. Our total company revenue grew 12% to $2.8 billion. Both adjusted and GAAP earnings per share came in on the high end of the range at $1.77 and $1.18, respectively. And finally, adjusted EBITDA grew 28% to end the year at $503 million.

Our numerous financial accomplishments are just a part of the success of our story, our success story in 2006. Let's now turn our attention to another key component, the advances we made toward our strategic objectives and how those advances were demonstrated by each of our businesses beginning with Airline Solutions.

Airline Solutions had another excellent year, exceeding its financial targets and continuing to evolve its business model. For example, recurring revenue now represents more than 70% of its annual revenue, which allows for a more predictable revenue stream going forward. We continue to increase our presence in the high growth Asian and EMEA markets such as China, India and the Gulf region. The business also surpassed its previous year's result, achieving its best sales quarter ever in the fourth quarter and leaving us well positioned for 2007.

For Sabre Travel Network we saw unprecedented accomplishments in 2006 and our confidence in the GDS model has never been stronger. The business finalized long-term agreements with over 300 airlines around the world, including all major US network carriers, locking in 60% of our air transactions for the long term.

Similar to Airline Solutions, Travel Network's revenue model continued to evolve, taking for example the fourth quarter of 2006, which represents the first full quarter after completing all of the airline deals and adding Expedia and Priceline bookings, total transactions for the quarter were up 14% and revenue was up 2% while we had a healthy operating margin of 15%, beating the year ago quarter by seven points.

We're pleased with the improvement in transaction volumes. As anticipated, the rate per transaction declined slightly as a result of the new airline agreements and the increase in lower priced, nontraditional transactions. But as previous guidance suggested, we've taken out significant costs in areas such as data processing and incentives to maintain healthy earnings and margins.

We continue to broaden our service offerings to meet our objective to be the ultimate one-stop shop for travel agents and the most effective marketplace for suppliers. And we launch the Efficient Access Solution program for our travel agency partners, guaranteeing them access to full content and protection from airline service fees. Additionally, with the adoption of EAS, we expect to better manage growth of travel agency incentives.

Now, turning to Travelocity, the business made significant year-over-year adjusted EBITDA and margin improvement across the regions. While we did experience some softness in revenue due to the foiled terrorist attack in Europe and in packaging in North America, we hit on all cylinders on the cost discipline front, making improvements in areas like marketing spend and customer service operations. We continue to differentiate ourselves from the competition through initiatives such as our customer loyalty program and co-branded credit card.

On the corporate solutions front we were pleased to add to our customer list Lockheed Martin, among others, adding significant transaction volume to the business. In Europe we executed, as planned on integration and Sarbanes-Oxley critical initiatives. We feel very well positioned to finish our integration efforts during 2007.

With these and other successes across all of our businesses, we continued to enhance shareholder return through underlying performance of the business, increased dividends, and most notably, through the proposed acquisition by Texas Pacific Group and Silver Lake Partners for a purchase price of approximately $5 billion at $32.75 per share. We remain on track to close the transaction by early second quarter.

And with that, I would like to turn it over to Jeff.

Jeff Jackson

Thanks, Sam. This morning I'll cover our results for total company and by business unit, starting with total company results for the fourth quarter. Our quarter year-over-year performance was strong in every business unit and led the way to a great start for 2007. Our total company revenue in the fourth quarter was $665 million, 6% or $34 million greater than last year. Total company adjusted operating income more than doubled to reach $83 million with an operating margin of 13%, nine points better than the prior year.

On a GAAP basis operating income was $49 million with a margin of 8%. Diluted earnings per share on an adjusted basis were $0.43, significantly better than the fourth quarter of 2005, driven by revenue growth across the businesses and cost reductions at Sabre Travel Network and Travelocity. Diluted earnings per share on a GAAP basis were $0.28 versus $0.09 in the year ago quarter.

Now moving to full year results for the total company. Revenue totaled $2.8 billion, growth of 12%. Adjusted operating income grew 30% to reach $398 million with an operating margin of 14%. On a GAAP, basis operating income was $285 million with an operating margin of 10%. Diluted earnings per share on an adjusted basis were $1.77 and $1.18 on a GAAP basis, both at the high end of our projected range. Adjusted EBITDA was $503 million or 28% better than prior year. GAAP net income was $156 million.

Free cash flow was $270 million with cash flow from operations of $379 million, more than double the prior year number, but below our expectations due to changes in working capital. Cash and marketable securities at the end of the year stood at $512 million, debt at $1.1 billion and net debt at $549 million.

Now, turning to the full-year results by business unit, Travelocity achieved strong growth despite some industry-related challenges in Europe and North America. Global gross travel book for the year totaled $10.1 billion, 35% growth over 2005. North American gross travel booked was $7.4 billion, robust growth of 18%. Europe gross travel booked was $2.6 billion.

Travelocity had total global revenue of $1.1 billion, strong growth of 31%. North America revenue grew 9% to $693 million, and revenue from Europe almost doubled to reach $393 million.

As expected, Travelocity more than tripled adjusted operating income to reach $73 million with a 7% operating margin. And on a GAAP basis operating income was $5 million. As a reminder, we consolidated the IgoUgo business into Travelocity during the third quarter, which put a $4 million drag on Travelocity operating income for the year.

Now breaking out Travelocity's operating results regionally, North America adjusted operating income grew over 50% year-over-year to $82 million with an operating margin of 12%, 3 points better than 2005. On a GAAP basis, operating income was $64 million with a 9% operating margin.

Europe had an adjusted operating loss of $9 million, a $24 million improvement over the prior year and on a GAAP basis had an operating loss of $59 million. Travelocity grew adjusted EBITDA by more than $60 million to end the year at $109 million. North America was $103 million and Europe was $70 million.

For, Travel Network revenue was $1.6 billion, growth of 1%. And total transactions grew 4%, both metrics in line with our expectations.

Moving to hotels, our hotel business in Travel Network grew at a steady pace. We had 17% revenue growth, thanks to SynXis, strong organic growth and innovative marketing programs. Revenue from hotels represents 10% of Travel Network's total revenue. And the Sabre GDS now handles distribution for more than 77,000 properties.

Operating income for the year on an adjusted basis was $283 million, a 15% improvement over the last year, driven primarily by cost reduction initiatives across the business. Adjusted operating margin ended the year at 17%.

On a GAAP basis, operating income was $249 million with an operating margin of 15%. Adjusted EBITDA exceeded our expectations and reached $331 million.

Airline Solutions had another great year with revenue of $283 million, growth of 8%. Adjusted operating income was $44 million with an operating margin of 16%. GAAP operating income was $38 million with a margin of 13%. And finally, adjusted EBITDA ended the year at $64 million.

Due to the pending transaction, I will provide 2007 outlook. However, I'd like to highlight that I was very pleased with our 2006 performance across the entire Company. I believe we are well positioned to grow and hit our financial objectives for 2007 and beyond.

And now, I'll turn it back to Sam.

Sam Gilliland

Thanks, Jeff. As Karen mentioned, we are not having a Q&A session because of our pending transaction. So I'd like to end today's call by saying it's been a pleasure working with all of you. And I am sure our dialogue will continue even as we transition to a privately held company.

Thank you. And with that, I'll turn it back to Mary.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 10:45 Central Time today through February 15th at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 860673.

International participants, dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844. Access code is 860673. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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