Sabre's (SABR) CEO Tom Klein on Q4 2015 Results - Earnings Call Transcript

| About: Sabre Corporation (SABR)

Sabre Corporation (NASDAQ:SABR)

Q4 2015 Results Earnings Conference Call

February 09, 2016, 09:00 AM ET

Executives

Barry Sievert - Senior Vice President of Investor Relations

Tom Klein - President and Chief Executive Officer

Rick Simonson - Executive Vice President and Chief Financial Officer

Chris Nester - Treasurer and Senior Vice President of Finance

Analysts

Brian Essex - Morgan Stanley

David Togut - Evercore ISI

Jim Schneider - Goldman Sachs

Ashish Sabadra - Deutsche Bank

Abhey Lamba - Mizuho Securities

Ryan Kerry - Jefferies

Bhavan Suri - William Blair

Jed Kelly - Oppenheimer

Matthew Bloom - Cowen & Co.

Operator

Good morning and welcome to the Sabre Fourth Quarter and Full Year 2015 Earnings Conference Call. Please note that today’s call is being recorded and also being broadcast live over the Internet on the Sabre corporate website. This broadcast is the property of Sabre. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of the company is strictly prohibited.

I will now turn the call over to Senior Vice President of Investor Relations, Mr. Barry Sievert. Please go ahead, sir.

Barry Sievert

Thank you, Chris, and good morning everyone. Thanks for joining us for our fourth quarter and full year 2015 earnings call. This morning, we issued an earnings release, which is available on our website at investors.sabre.com. A slide presentation, which accompanies today’s prepared remarks, is also available during this call on the Sabre IR website. A replay of today’s call along with the slide presentation will be available on our website beginning this afternoon.

Throughout today’s call, we will be presenting certain non-GAAP financial measures, which have been adjusted to exclude expenses and other gains or losses relating to restructurings, litigation and tax matters and certain other items. All references during today's cal to EBITDA, EPS and net income have been adjusted for these items. The most directly comparable GAAP measures and reconciliations are available in the earnings release and other documents posted on our website at investors.sabre.com.

We would like to advise you that our comments contain forward-looking statements. These statements include, among others, disclosures of our guidance including revenue, EBITDA, net income, cash flow, dividend ratio, CapEx and earnings guidance; our expected segment results, the effects of recent acquisitions, implementations, agreements or end products, our expectations of industry trends and various other forward-looking statements regarding our business.

These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today’s conference call. Information concerning the risks and uncertainties that could affect our financial results is contained in our SEC filings, including our Form 10-Q for the quarter ended September 30, 2015 and our Form 8-K filed on November 04, 2015 and our form 10-K for the year ended December 31, 2014.

Participating with me on today’s call are Tom Klein, our President and Chief Executive Officer; Rick Simonson, our Executive Vice President and Chief Financial Officer; and Chris Nester, our Treasurer and SVP of Finance.

Tom will start us off with a review of our strategic and commercial performance and then Rick will offer perspective on our financial results and forward outlook, before turning the call back to Tom for closing remarks. We will then open the call for your questions.

With that, I’ll turn the call over to Tom.

Tom Klein

Thank you, Barry. Good morning everyone and thank you for joining us today for our fourth quarter earnings call. We had a strong close to 2015 as we continued to build momentum and capitalize on opportunities, a trend that started when we entered the public market in 2014.

Before we get into the financial results, let me share with you some of the drivers of our success. We're working closely with our customers to out-innovate our competitors, innovation in next-generation platforms that help our customers achieve greater traveler intimacy, along with capabilities that are the foundation for future business model changes in our industry. We brought over 30 new innovative and unique solutions to market since our IPO.

Let me share just a couple of examples. Sabre Intelligence Exchange, which accesses disparate airline data to create passenger-centric innovation, which analytic applications and automated business processes in a faster more cost-effective way and airlines are already seeing results, maximizing revenue, enhancing the customer experience and generating IT cost savings based on over 150 use cases and applications that have been deployed on top of this flexible platform.

Intelligence Exchange's recent customers include Southwest Airlines, Aeroflot, Alaska Airlines and Jet Airways. Intelligence Exchange is an innovative and unique solution that you can only get from Sabre. Our Dynamic Retailer allows airlines to dynamically offer varied services and products to customers right up until departure. It generates personalized offers based on customer history and preferences.

Airlines are using Dynamic Retailer to dynamically price seats based on customer insights, helping the airline increase sales and convergence, deliver personalized travel experiences and maximize brand loyalty. Virgin Australia, WestJet, kulula and Alitalia have Dynamic Retailer permutations planned for 2016. And the SynXis enterprise platform, the most widely used in the world provides a single unified platform that enables hotels to seamlessly integrate their technology systems and maximize the impact of their distribution strategy.

It also gives chains and individual properties actionable insights by leveraging our growing portfolio of intelligence capabilities that help to optimize channel mix, benchmark competitor performance and get smarter about their guests every time they walk in the door at any property on every trip. And at the same time, as releasing these new solutions, we've been investing in and writing some exciting new innovations in Travel Network, including the next big release of the Sabre Red Workspace that will be released this summer.

Their enhancements to the rich graphical merchandising capabilities of the platform will support increased ancillary and branded fare sales and enhance hotel capabilities. Additionally, the platform features agency revenue optimization tools and a beautifully designed user interface that will maximize agent productivity.

And we're innovating in other new releases of current products, like with our Recovery Manager in your regular operations to be [ph] accommodation solution, these solutions quickly optimize the process of repositioning planes, rescheduling crews and re-accommodating passengers in dramatically less time. We benchmark our customers' recovery performance against others in the industry. We had a great proof point just a few weeks ago as our customers were up and running after winter storm Jonas ahead of the competition.

And as I mentioned last quarter, we already have hundreds of millions of contract value closed across our new solutions, proof that we can bring innovations to market and have them quickly scale due to the strength of our platform and our global customer base. Our strategy to deepen our customer relationships by adding more and more critical capability to our platforms in areas of these trends in the industry is paying off.

In 2015 we exceeded our sales targets, we increased our share of wallet of current customers and we signed important deals like the SynXis Enterprise Platform deal with Wyndham and the agreement to extend SabreSonic across the entire group at LATAM. Late in the year we worked with American Airlines to execute the largest airline reservations technology integration in history. This project involved intensive collaboration between our teams committed to migrate data and integrate systems allowing for a smooth transition to the SabreSonic solution. American's view is that it was the best project of its kind in the history of the industry.

And we focus Sabre providing business-to-business SaaS products to the travel industry, investing in organic product development and acquisitions that add scale and customer depth. Acquiring Abacus gives us a wholly-owned leadership position in Asia-Pacific where we'll increase the intensity of our marketing and sales to deepen customer relationships, driving share and growth in the region. The acquisition of Trust extends our leadership in hotel reservations while significantly expanding our non-U.S. business.

During the year, Travel Network increased global share by a full point with gains in North America and 170 basis points share growth in EMEA. We improved our capital structure refinancing high-interest debt with lower interest expense and pushed out our maturities. We bought back $100 million of stock and reduced our overall leverage providing increased flexibility as we look ahead. And finally, we delivered top and bottom-line growth that is increasingly rare for a technology company of our size and sets the stage for continued growth in 2016 and longer term.

Our competency for operational excellence and sales execution in bringing innovative technology to market drove full-year results consistent with the growth and stability of the Sabre business model we've demonstrated over the past eight quarters. Revenue increased 13%. EBITDA grew 12%. EPS increased 17% and importantly, free cash flow was 51% higher than 2014.

Our vertical SaaS software business Airline and Hospitality Solutions had an excellent year. Revenue increased 11% and EBITDA grew 14%. Segment revenue was $872 million. EBITDA of $324 million and EBITDA margins of 37.1% both hit new highs in 2015 and we expect further growth in 2016.

Passengers boarded increased 15% to $585 million and the Airline Solutions revenue increased 9% to $713 million. Hospitality Solutions revenues increased 21% to $159 million. When combined with Travel Network in 2015 we booked approximately $130 million hotel room nights. We expanded our geographic reach and customer base with the acquisition of Trust earlier in the first quarter.

At Travel Network we delivered global growth and increased share. Globally, our 2015 share increased a full point to 36.6% with 80 basis points of growth in North America and 170 basis points of growth in EMEA. Acquiring Abacus bolstered our position giving us control of our destiny in the fastest-growing travel region in the world. With that integration well underway, we're now getting much deeper with our Asia-Pacific customers to ensure that we have the right solutions for the market and create opportunities to grow market share. In EMEA we continue to grow the business which is much faster than market growth rates.

Overall, full-year Travel Network revenue and EBITDA increased 13% each while bookings were up 18% from 2014. And we're also proud that Travel Network began 2016 by being awarded the Travel Weekly Readers Choice Award for the best GDS for the seventh year in a row. Now Rick will give more detail about the fourth quarter in a moment, but at a high level we finished a strong year and delivered a great set up for 2016.

For the quarter total company revenue was $758 million a 17% increase. EBITDA increased 15% to $229 million, earnings for the quarter increased 23% to $0.27 per share. For Airline Solutions 2015 was our second highest sales year ever when measured by total contract value and the fourth quarter saw terrific balance of wins in both the AirCenter and AirVision product suites. These included several new agreements for Intelligence Exchange, Flight Plan Manager and our upcoming release of Crew Manager late this year.

Our New Crew Solution will be the best in the industry. The diversity of our sales and commercial and operational areas was the best that we've seen in recent years and we expect that to continue into 2016.

In Travel Network fourth quarter revenue increased 22% and EBITDA 21% for the quarter. Bookings were up 33%. Of course Asia-Pacific bookings were a significant portion of the growth, but we also had 9% in North America and 14% growth in EMEA.

And while we're never completely satisfied, we're very pleased with the excellent performance in 2015, specifically regarding issues within our control, strategic execution, sales excellence, implementation and operation and financial execution and we fully delivered while continuing to innovate to the benefit of our customers. The performance on a micro basis puts us in a terrific position as we step into 2016.

And we set our 2016 expectations with a macroeconomic background and backdrop that potentially had a bigger dose of volatility than we've had in recent past. We've considered that in our plans and in our guidance. A distinguishing characteristic of Sabre is our resilient stable business model.

We've talked about this since our IPO and we've demonstrated it in results across 2014 and 2015 in a world that has had its fair share of a macroeconomic volatility. And while there might be shifts in the macroeconomic environment, we expect any impact to our business to be much more muted. And with as context we expect 2016 will be another good year for Sabre.

In 2016 we expect acceleration from 2015 revenue, EBITDA, earnings and importantly free cash flow. We will benefit from our business model that features a balance of growth and stability driven by long-term customer relationships, contracts, flat fee pricing and dedicated customer care that results in renewal rates in the very high 90s and that all adds up to a resilient business that has great visibility into our future growth.

And with that, I'll turn the call over to Rick for some additional commentary on the quarter and for the forward outlook.

Rick Simonson

Thanks, Tom. Airline and Hospitality Solutions revenue grew 8% for the quarter to $232 million. Contributing to the rise in revenue was the increase in our airline customers passengers boarded and continued strong growth in Sabre Hospitality Solutions. Revenue and EBITDA growth were muted by tough comparison as we previously discussed and expected. 177 million passengers were boarded using our SabreSonic Reservation System a 42% increase year-over-year driven by solid growth in our customer base and the October SabreSonic implementation at American Airlines. EBITDA increased 1% to $86 million resulting in a Q4 EBITDA margin of 37% for this segment.

Travel Network revenue increased 22% and EBITDA increased 21% in the quarter supported by our overall bookings growth. Excluding the impact of consolidating Abacus, Travel Network revenue increased approximately 6% in the quarter. Bookings increased 33% in the quarter. Growth was driven by the acquisition of Abacus as well as solid growth across our North America and Europe, Middle East, Africa business. Even when excluding the positive impact of the Abacus acquisition, global bookings increased a strong 8% overall in the quarter.

North American bookings grew 9% in the quarter driven by solid travel trends and share gains within the OTAs. Our momentum continued in EMEA where bookings driven by new agency conversions and solid share gains increased 14% in the quarter compared to low single digit in the region overall. In Latin America continuing weakness in Venezuela and Brazil led to a 4% decline in bookings year-over-year.

Moving to Sabre's overall income statement, the big 4Q drivers were the acquisition of Abacus and growth in our core Travel Network and Airline and Hospitality Solutions businesses.

A quick recap of consolidated quarterly results, revenue $758 million an increase of 17% year-on-year, gross profit totaled $336 million a 20% improvement from the same period in 2014 and total EBITDA increased 15% to $229 million. EBITDA grew slower than revenue due primarily to the Abacus integration costs. Net income grew 27% to $76 million and Sabre consolidated earnings-per-share were $0.27 for the quarter up 23% year-over-year.

Moving to the balance sheet and cash flow, we generated $56 million of quarter four free cash flow more than double the same period last year and for the full year we generated free cash flow of $243 million, an increase of 51% over 2014. Full year free cash flow margin increased to 8.2% of revenue up from 6.1% in 2014.

On CapEx our Q4 total adjusted CapEx, that's the sum of GAAP CapEx and capitalized implementation costs was $97 million. Capitalized implementation costs were $14 million of this amount. Full year adjusted CapEx totaled $350 million including $63 million of capitalized implementation costs. This compares to $265 million in 2014. Cash implementation fees collected from customers, that's cash totaled $93 million.

Year-end total net debt was $3.1 billion reflecting strong free cash flow growth and the proceeds from the Travelocity sale offset by the funds used for the Abacus acquisition and the share repurchase. Leverage declined for the year. We ended the year with a leverage ratio net debt trailing 12 months EBITDA of 3.3 times compared to 3.5 times at the end of 2014.

Return on invested capital is an important measure of our long-term value creation and it is the lens through which we evaluate both internal and external investment opportunities. Sabre ROIC in 2015 was 9.3%. We have clear sight to increasing ROIC in the near to medium term. We will deploy increasing amounts of absolute capital in the projects we expect to deliver growing returns well in excess of our cost to capital.

In 2015 we divested businesses that were a drag on ROIC while increasing our investment in areas that offer higher expected returns. I'll talk more about our performance and expectations related to ROIC at our upcoming 2016 Investor Day.

Now let's turn to the outlook for 2016. As you can see, we're expecting to build on 2015's solid financial results with a year of accelerated growth across the business. All of this is within the context that Tom articulated in his remarks. Our eyes are wide open to the more volatile macroeconomic environment and though we will get the benefit of the stable, resilient, Sabre business model that has shown its ability to better absorb shocks than many peer business models.

For the full year 2016 we expect total company revenue growth to be in the mid-teens or between $3.39 billion and $3.43 billion. In total we expect Airline and Hospitality Solutions full year revenue growth of 17% or more. Seasonally, we expect first quarter revenue growth in the teens and a bit higher growth rate through the balance of the year. We expect Airline and Hospitality Solutions full year 2016 EBITDA margins to increase nearly 1 full point to 38%. We will see the continued benefit from the increasing scale of our platform in 2016.

We expect full year SabreSonic passengers boarded growth of more than 30% driven by continued solid travel trends underpinned by capacity growth in North America and Europe, Middle East, Africa. 2016 growth will also be supported by the already completed American Airlines implementation and the upcoming Alitalia and Air Berlin implementations late in the year. Hospitality Solutions has significant momentum and growth will benefit from the integration of Trust as well as the ongoing new implementations.

Full-year Travel Network revenue is expected to increase between 13.5% and 14.5% with anticipated growth of approximately 20% through the first half of the year and mid-single digit growth in the back half reflecting the mid year anniversary of the Abacus acquisition.

As previously communicated margins will decline a bit due to the full year impact of Abacus acquisition. We expect Travel Network's 2016 EBITDA margins to be approximately 40%. We expect strong overall full-year bookings growth of approximately 15%.

The Abacus acquisition will continue to bolster growth through the first half of the year. We expect solid booking trends in North America and share gains in EMEA to continue to be the main drivers of the underlying business growth with modest headwinds from the slowing Latin America and Asia-Pacific economies.

Turning back to consolidated Sabre, we expect mid teens growth in total EBITDA eclipsing the $1 billion milestone with between $1.08 billion and $1.1 billion of total EBITDA. Our capital markets work over the past year reduces our interest expense run rate to approximately $40 million per quarter. We also continued to improve our tax structure resulting in an expected full year effective tax rate of approximately 33% to 34% a significant improvement over 2015's effective tax rate of approximately 37%.

We expect these below the line benefits will turn mid teams EBITDA growth into full-year net income growth of around 30% at between $395 million and $415 million. We expect similar growth in EPS in a range of a $1.40 to a $1.47 with stronger year-over-year growth in the first half of the year compared to the back half.

So mid teens revenue and EBITDA growth will drive net income and EPS growth of around 30%. We expect this growth combined with modest growth in capital expenditures to drive free cash flow that approaches $400 million, growth of over 60% and well on our way towards our stated goal of more than $500 million of free cash flow in 2017.

Reflecting this outlook and part of our commitment to shareholders we have increased our targeted dividend payout ratio to 35% to 40% of net income up from the previous range of 30% to 35% of net income Accordingly our expected quarterly dividend has increased from $0.09 per share to $0.13 per share.

Full-year GAAP CapEx is expected to be approximately $300 million up modestly from 2015. We also expect to capitalize implementation costs of approximately $95 million to support our ongoing implementation work. These will be partially offset by approximately $70 million of upfront cash customer implementation fees.

In summary, 2015 was a strong year that demonstrated the power of our business and financial model. We focused the business, invested in areas of strength, out-innovated our competitors and delivered the growth that we expected. We fully anticipate 2016 to be even better.

Tom, back to you.

Tom Klein

Thanks, Rick. In 2015 our business hit its strike, delivering meaningful growth and putting the pieces in place to accelerate that growth in 2016. While we have to be globally aware, we'll not be distracted by the current macro of our volatility, stay focused on delivering technology that helps our customers adapt to the changes in markets and in traveler expectations and are driving long term value for all of you.

I’d like to thank our employees around the world for their commitment to delivering value to our customers and shareholders and putting us in the excellent position that we're in, that we find ourselves in as we enter 2016.

I’d also like to thank our customers and shareholders for your continued confidence in us. We appreciate your trust, [indiscernible] every day. And with that, I’ll turn it back over to the operator Chris to open the line for your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Brian Essex of Morgan Stanley.

Brian Essex

Good morning and thank you for taking my question. Great quarter. Rick, I had a question for you on, I guess we'll focus on Hospitality and Airline Solutions. A lot is going on there this year, you’ve got substantial number of PVs [ph] with Air Berlin, Atelier [ph] LATAM all rolling on plus others through kind of, I guess the last we've heard through 2017 as these go online and we think about, we start to contemplate looking at the Southwest rolling off at some point in 2017, how would you guide investors with regard to pricing EB [ph] growth and some of the impact to margins, particularly as you go through this American Airlines transition?

Tom Klein

Yes, Brian thanks. And so as you say we have got, we had a lot going on this year. We executed it successfully. We’ve been working and that was evidenced by the American Airline implementation as Tom referenced and we’ve been working on Air Berlin, Alitalia and some smaller ones, Air Serbia, Air Seychelles cope as well and we have Air Berlin and Alitalia coming in late in almost year '16 LATAM wouldn’t be until 17. So we won’t see that impact until later.

As we've talked before overall, the deals that we've won from American through LATAM and those in between in total as those would then come to bear all our sequel we would see a kind of our fee structure to be about where it’s been previously, obviously American Airlines being the biggest airline in the world probably gets a little bit better than some of the smaller ones you can be assured and there is a mix of what total solutions that they’re taking with that.

Some of the customers are taking just the base SabreSonic Reservation System, other customers are taking essentially the whole suite around the CSS solution as well as many of our other SaaS products around operational and commercial suite in our AirCenter and AirVision. So we see that playing out that way. In between of course, you have a little bit of pressure coming on with the American contract given its finer pricing, but as you can see we’ve got other kind of operational efficiencies and scale benefit in our platform, so that we’re going from we hit a strong mark little over 37% EBITDA margin here last year. We’re looking for 38% in 2016 even with this effect before bringing on and having a full-year of big implementations like Alitalia, Air Berlin and LATAM for instance.

Contributing to that also is our work in hospitality. As you’re aware, we’ve had a terrific start to the introduction of our SynXis Enterprise Platform Solutions both central reservation and property management with Wyndham. Those rollouts are going on throughout the year and so we are actually expanding a lot before we get the full benefit of the 4500 hotels that will come on by 2017 in property management and the full 7500 hotels that will come on in Central Reservations again towards 2017.

So all-in-all we see pricing to be rather stable across that period with those implementations and we get a little bit of scale from the business to show that we should be able to hit the very high 30s over there, this year we expect and we don’t think that that’s a limit as we talked before when we look further out.

Brian Essex

Maybe if I could follow-up just quick on…

Tom Klein

Yes, just two things I mentioned earlier that I also wanted to be clear on the solution growth first as I said the balance of sales across the portfolio. So as we sold into the fourth quarter very good pick up on our AirCenter Solutions which is on the operational side and on the AirVision side is on the commercial side.

And really, as I talk about these new solutions and the innovations we are bringing to market, the strategy there really is to put critical – more critical services on top of the SabreSonic platform and that means the pie gets bigger and we will get more granular about that as the year goes on, but we think we can increase the size of the pie that we’re selling and do want to take a bigger share of wallet from our current customers as we add these new solutions.

So that’s why I mentioned this solution count over time here is we’re selling, we’re innovating into the trends around what airlines want to do with passengers and airlines are willing to pay for those services because they wanted. They believe there is revenue uplift, but they also can’t deliver those services without great technology. And as Rick said, we feel great about being able to do that and do all the organic development and bringing new solutions to market and still see a point of margin increase in 2016 and we think we can keep driving margin up in the solutions business. So we feel really good about our ability to grow this business.

Brian Essex

Maybe on the hospitality side, is there a systematic approach where some of that upside has been whether we’ve really been surprised on the high end frankly, particularly when you foresee and if you see those deals come on, is there kind of a dramatic approach to DRS, PMS connection and giving them better visibility that is playing out there that maybe we can appreciate during the IPO?

Tom Klein

Yes Brian, I think in the hospitality space some of that still needs to play out, but I used the term before and I truly believe it and I hear it from a customer is that they are looking for somebody to redefine the space and bring a platform of technology that they can use across the marketing and their operations. We are very well positioned to do that. We have - that’s what the Sabre Enterprises, the SynXis Enterprise Platform is designed to do, but I think we have to get further along on the uptick.

Certainly, our property management system business is relatively nascent. We have a lot of opportunity and upside there. We've been selling strongly into the Central Reservations Market and we really feel that we can walk into any Central Reservation deal and when whether it’s a single property or whether it’s some of the largest chains in the world. So we’re just continuing to have our way and add sales resources around the world.

We really like the Trust acquisition for that reason. It brings us into gives more strength and breadth in some geographies that we’re not as strong in today and we have said in the hospitality business that at the beginning of 2015 or about 35% of our revenue was from ex-North America. Over time we believe that could flip to be 35% North American revenue and 65% ex-North America. We expect to be selling into that trends as well. So a lot of different levers, but we’re focused on pulling them all.

Brian Essex

Great, thank you.

Operator

We'll take our next question from David Togut of Evercore ISI.

David Togut

Thank you, good morning Rick and Tom.

Tom Klein

Good morning, Dave.

David Togut

Good to see the 44% dividend increase, could you dig into the just the macro assumptions built into the Travel Network a little bit more? I heard your thoughts in terms of solid North America share gains, share gains in EMEA, but could you give us a sense of the range of let’s say airline bookings growth scenarios you've thought about for 2016 and to what extent is it Travel Network outlook tilted conservatively in this environment?

Rick Simonson

Yes David. In 2016 we really see kind of the macro shaping up along the lines of 2015, so let’s recap. Good underlying growth in North America and you see that across both the solid growth across the corporate sector and leisure is doing fine and we have also increased our share with some of the faster growing OTAs in North America.

So we think the underlying macro there sets up in 2016 much like 2015 we powered through the very steep decline in the energy sector and the related drop offs in that area which is a pretty big one didn’t have any problem with that really and we think that’s largely behind, so that relatively stabilized, so we see that shaping up pretty well.

And then in Europe, Middle East, Africa, we continue getting benefit from share gain there and we did that quite successfully in 2014 and 2015. We see 2016 shaping up as well, little less market growth there in North America as was the case in 2015, but our share continues to grow.

In Latin America, again that market contributed to and in fourth quarter you saw some of the overall market booking weaknesses, we reflected that not any better, not any worse and we think that that market is going to continue to be a bit of drag in 2016, APAC a little more muted than previous years, but roughly is still going to be able to provide us with growth in the APAC market.

In terms of capacity employments I think the assumptions are employment somewhere up in the 4% to a little bit more range for 2016 underlying, you have seen most of the major North American Airlines report and talked about capacity growth it ranges from a percent or two to 4% and then some of the faster growing ones in actually double-digit to the capacity growth saw some of the numbers out of Europe this morning as well with Lufthansa and others that are showing us the capacity growth for first half is pretty well set.

And we think that that is going to be supportive of making sure that there is enough seats out there for traveler demand and having the right kind of price competition, so that it sets up pretty well and those are pretty well locked in for the first half, so that’s the visibility we have.

David Togut

And then on APAC when should we expect to see potential share gains via the Abacus consolidation, have you made all the changes that you would like in the sales force and go to market?

Tom Klein

Yes, this is Tom. We’re well along on the integration and getting all the pieces in place on the sales force and the go to market. But look, Asia-Pac will be a little bit like Europe and that it’s a much more fragmented market than what we have here in, the U.S. really is unique with the size of some of the big players here we can grab a big chunk of share from one player. Asia-Pacific will be more of a market focused share approach where we think in some markets we are underweighted.

I'd mentioned before that Abacus was underweighted in India as an example, but look, we think it’s a steady push to get people on our platform and to increase the sales intensity, but I think it will take a little bit of time to get some pick up, at least meaningful pick up. But we don’t expect to lose ground we expect to gain ground this year, but I don’t think it’s a big swing.

David Togut

A final question on the Lufthansa GDS surcharge, any thoughts on how this is impacting direct versus indirect bookings in EMEA?

Tom Klein

Yes it’s a little muddy right now, I mean we've said, I've said a few things before and I will just reiterate them. From a strategy perspective, we’ve not seen an airline take a strategy that increased costs and introduce inefficiencies and also have them price in competitive and have that win out over the long-term. That said, we believe a lot of the things that Lufthansa believes as far as the model needs to be enhanced, it needs, the business model needs to change. And when we talk about these solutions that we're putting into the market, we’re talking to Lufthansa as well as other airlines about how they can use our technology to change their relationship with their customers and that we can do that in a channel agnostic way.

We hope they will find their way to see what we see which is they get significant revenue premiums in the GDS channel and if they’re able to have – deepen their relationships with their customer, they should be able to get even more premium revenues from the GDS channel as well as other channels.

So we haven’t seen any numbers that indicate that there has been a big shift. We haven’t seen an impact to our bookings in any meaningful way across the board. We think that as Rick has expressed in the last couple of calls that we believe that we are either picking up those bookings through either co-shared partners of Lufthansa or other airlines that overlap with Lufthansa and we’ve not seen a decline of our overall bookings.

So, no I think it continues to play out, but we’re having conversations with Lufthansa about how we can help enable new business models and different relationships with their customers that they’ve set us core to the strategy.

David Togut

Understood, thank you very much.

Tom Klein

Thanks David.

Operator

We will go next to Jim Schneider of Goldman Sachs.

Jim Schneider

Good morning, thanks for taking my questions. Congratulations on the strong results. Tom, I was wondering if you could maybe address the pipeline of solutions, potential customer wins over the next say 12 to 18 months and what do you think we might able to expect in terms of any large deals that are coming up for bid and kind of how you feel your position given some of the successful implementations you've had over the past couple of quarters?

Tom Klein

Yes, I mean, first Jim as we've said before, we feel like there is a significant pipeline out there of passengers boarded to get that, are projected to come up for bid, some of those are more mature than others and I’m not going to comment on any specific airline deals, but I would say that there are large deals and mid and small sized deals out there that typically are. We feel that our performance has enhanced our position.

Certainly the whole industry watched what happened at American Airlines and I think that was a really good performance and we’ve seen these implementations at times take multiple years as many as four or five years with some of our competitors and we’ve been pretty consistent being able to drive these implementations inside of 36 months and often inside of 18 months.

So we have a good track record of delivering what we say we’re going to deliver on time. We think the solution is robust and again we continue to – we don’t believe that anybody is keeping pace with us from an innovation perspective. So we feel really good about the sales pipeline and our ability to sell in. And again, we’re also very focused on increasing the size of the pie specifically in the SabreSonic area, so taking the opportunity to sell into new services and SabreSonic area, both at existing customers as well as new customers.

So the pipeline that we’ve been talking about for the last – really the last 12 months hasn’t really been chipped away at all that much. We’ve announced a few wins. There have been a few small deals out there, but there is still nice big pipeline of business that we expect to be out for our pain and we'll be one of the players stable.

Jim Schneider

That is helpful, thanks and…

Rick Simonson

Yes, and Jim, yes go ahead.

Jim Schneider

Oh, yes, so just a follow-up question maybe for Rick on the margins, you've talked about the one full point of solutions margin expansion for the year. Can you maybe kind of comment on the profile of that, I mean are we essentially going to see that improve over the course of the year as you kind of start to get synergies from Trust and then any other kind of cost savings as volumes pick up and how should we think about that kind of on a run rate basis exiting the year versus full year?

Rick Simonson

Yes, so as the Sabre is moving from about 37.1% to about 38% for the year and this year we don’t see anything real quirky about the quarters as we move through that, so you should see a pretty smooth progression there Jim, nothing but dull [ph] increase.

Jim Schneider

Good to hear, thank you so much.

Operator

We will go next to Ashish Sabadra of Deutsche Bank.

Ashish Sabadra

Good results and solid guidance. Just quickly on the Air Travel Network we have seen some pretty solid momentum there and you talked about taking a more conservative view, but you are still guiding to a pretty good 6% bookings growth which is very encouraging. You talked about the capacity growth which we see across the U.S. and EMEA airlines which is again very encouraging.

I was just wondering if you could maybe talk about LATAM. That's been a slight drag, but you’ve been – obviously been able to grow over that drag, just as we think about the Zika virus have you seen any initial moderation in volume because of that or based on your experience looking at Ebola or other such concerns do you anticipate any impact to the LATAM volume? Thanks.

Rick Simonson

I think let’s start with based on experience, I mean whether we certainly do deep dives into impacts on things like SARS and Ebola, some of these events go back now almost a decade, some of the pandemic events that we track and generally we see a volume shift that’s very manageable and a relatively swift recovery once things are under control and the public is educated on the real risks. And we hope that, that is the same with Zika. I think we’re still a little bit early, but I think early results are encouraging. I think there was a little bit of panic, let’s call it a week or 10 days ago when some news first broke, but we think it’s calmed down quite a bit and we haven’t any meaningful impact volumes at this time. We haven’t heard any of our airline customers talking about meaningful declines in volumes.

Ashish Sabadra

That’s good, that’s great. And just quickly on the margins for the Travel Network segment, so how should we think - we understand there is some headwinds right now from the Abacus acquisition, but have you started gaining the cost synergies on the Abacus acquisition, how we should think about the margins going forward?

Rick Simonson

Well again Ashish, as we said in 2016, we will feel the impact of that one-time step that I talked about at the merger from approximately 42 to 40 and that’s where we will traverse in 2016. We really need the year to get the full synergies in place in 2016 before we get the full benefit of those in 2017. You know as Tom said, the integration is going well. We’re well on our way, but we will need time to get those fully in. So right now I see it as all else equal at this 40% level and we will implement the synergies that we identified, we will do that on time and then we will have to see what we might do from there.

Ashish Sabadra

Now that sounds great. So in some sense Rick, the way to think about it as the margins will trough this year and then as the synergies come in we should see potential upside going forward, is that the right way to think about it? I understand you already gave guidance.

Rick Simonson

I think from Abacus integration itself, I wouldn’t say that that would be the driver, we will just have to look across all of the business and we will give you an update on that as we update our medium term outlook. So what we are looking for is stable margins, like we have been driving the business in Travel Network and stable is 40% now and we get good top line growth on that and we continue to have great free cash flow conversations. So you can see how that really contributes all the way down the P&L and it doesn’t require any kind of material margin expansion to make the model work in a leveraged, positive leveraged way.

Ashish Sabadra

Yes, absolutely. It’s very encouraging to see that free cash flow guidance approaching $400 million so that’s very positive. Just quickly on, last question on the corporate expense, that was $65 million compared to $75 million in the third quarter. How should we think about the quarterly cadence going forward, is the fourth quarter good approximation going forward?

Tom Klein

Yes, we had a bit more in third quarter for the reasons we had talked about primarily professional services fees and secondary offering fees, some of that was around the security one time that we had in third quarter. Fourth quarter is more indicative run rate.

Ashish Sabadra

Okay, that’s great and again solid guidance, congrats.

Tom Klein

Thanks.

Rick Simonson

Thanks.

Operator

We’ll take our next question from Abhey Lamba from Mizuho Securities.

Abhey Lamba

Yes, thanks congrats again really good performance there. As you look at your guidance, the macro situation is clearly evolving rapidly. What factors expense factors would be paying attention to [indiscernible] performing as well as the guidance?

Rick Simonson

Yes, so Abhey, in the macro is – it was trying to shape in terms of my remarks is, we've got our eyes wide opened to that and obviously there is more macroeconomic volatility today and we sit here than there was in say December what people expected. But it is an important and to understand that our plan and our guidance as Tom said, you know cutting corporates that view it is not an old static view. It is a current view and we've got a business that shows it’s able to absorb some of those things with the other positive effects that we have around the world and the region.

So again, you know solid set up underlying macro for North America. We’ll continue to perform well there on a competitive basis similar solid, but a little slower growth in Europe, Middle East, Africa, but we're getting gains there. And we think we've seen even as we exited the year significant decline and you've seen that in across the Airline results in Latin America and we have expected that Latin America is not going to get better in 2016. That’s incorporated in our outlook.

And as well, there has been somewhat of a softening that was apparent in the fourth quarter in APAC overall related to a little bit of the slowdown in China and some of the collateral of that. So we've got those fully in our sights. We've got it in our building to our guidance and we think we can play through if it still plays out that way.

Tom Klein

Yes, and I think that the other things that we have to be focused on is as I mentioned in my beginning remarks, we just want to see the types of swings that the background environment might have in our business with typically you know both on the upside and downside we are seeing relatively moderate at swing. And part of that is and I think I felt even more confident in this environment where it is very effective to fly airplanes in an environment when you have under $50 barrel oil and when you are down at $30 a barrel.

There is very little uncertain at even with, in a down economy the full capacity of the market, you are going to price delay and some demands and pricing into demand is our friend. We get a flat peak on the bookings and we're happy when there is – they certainly want a healthy air industry, but we're happy when airline seats are on sale.

So in this kind of environment we just don’t think we are going to see the dramatic swings that you might in other sectors of the economy and as Rick said, we have been eyes wide open and we take certain level of what we believe is going on based on the most current data we have into this guidance that we have provided today.

Abhey Lamba

That’s very helpful, Tom really you put things in perspective there. And I'm more interested last few month the solutions business, can you discuss the impact of the Trust acquisition, does it offer you some new capabilities that you can monetize within your existing installed base, what type of revenue synergies [indiscernible] over time? That's it from me, thanks.

Rick Simonson

In terms of Trust's new capabilities?

Tom Klein

Yes, I think, yes as I mentioned and when we acquired Trust what we like most there is, one it was a very well managed business, so we pick up people that are that we think are really terrific and will plug right into our team and we like the geographic footprint. I think from - they do have some solutions that we can bring to our customers and conversely we have a broader set of capabilities that we can bring to their customers.

So, we think there is a share of valid play in both directions this revenue synergies in both directions and we're, the teams, the early plan here was to work to figure out how quickly we can get at some of those, but I think that’s really the opportunity is to cross sell solutions into the few customer basis. We've both been pretty effective at broadening our portfolios over time and pushing solutions into our customers. So there are a few new capabilities on their side, but they are certainly upside are things that we can bring to their customer base well.

Rick Simonson

And Abhey, this is Rick. On that regard as we said at acquisition what we expected we felt the Trust was a very well run company both operationally and financially and they've got great sales excellence and we’re seeing all of that confirmed as we've brought the companies together. So we think that just gives a great critical mass into our organization that it becomes ever more powerful.

Abhey Lamba

Thank you.

Operator

We'll go next to John King of Bank of America.

Unidentified Analyst

Good morning. This is Tim [indiscernible] for John King. I have a one question on the cash flow, so you previously set a target for $500 million and of free cash flow in 2017. Now this was set to a while back and given the strength of the operating performance since then I was wondering whether you are trying to update the forecast? And related to that, is there anything we should taken into account which might offset some of the momentum when we think about where we end up in 2017? Thanks.

Rick Simonson

Yes, thanks – we feel very good about the free cash flow trajectory we have been on and we’re hitting all our marks this year and in terms of what we delivered in 15 and with the approaching $400 million in '16 we’re right on schedule and as I said I reconfirmed our expectation of a target of reaching $500 million or more in 2017.

So all in intact there and again at our Investor Day later in the Spring we will give update across the whole financial model and the shape of that in terms of medium term which we need to push out, right start of the medium term in 2014, same here we've got pretty good visibility through '17. We'll give you an update on that, but everything is intact in terms of the free cash flow generation that's reflected by our increased in the dividend one and again reiteration that our expectations and guidance for '16 specifically on track for what I laid out last April at the Investor Day and the $500 million plus in '17 looks intact.

Unidentified Analyst

All right, thanks very much.

Operator

We turn next to Jason Kupferberg of Jefferies.

Ryan Kerry

Good morning, this is Ryan Kerry, calling in for Jason. I just have another quick one on the Trust business and I apologize if I missed it earlier, but you still expecting approximately $40 million benefits to result in 16 from the acquisition and should we think about the benefit is pretty evenly spread across 2016?

Rick Simonson

Yes, $40 million is the revenue and pretty evenly spread out

Ryan Kerry

Okay, perfect and it’s nice to see the launch of the NDC technology on the American Airlines. I think it was just announced. I assume this didn’t have any impact on the fourth quarter, but going forward I was hoping you could speak to the potential for the rollout at other carriers and I’m assuming this is likely a higher yielding reservation for Sabre, so should we expect let's say over the next 12 months to 18 months we could see a pickup in average booking fees?

Rick Simonson

I think well, let’s talk about technology side and then I’ll circle back on the seat part of the question. On the technology side, look we’ve said this for a while. Our higher [ph] standards don’t drive innovations, they never have and they never will. So NDC is an idea and technology providers like us are going to have to make that idea real and bring it to light for customers and be able to sell real technology that can provide new capability. So there has been a lot of tougher I would say around that the concept of NDC, but NDC is a white paper and again companies like ours need to bring real technologies to market. That’s what we did in American Airline.

I think there will be some of the technology will be kind of NDC compliant. I actually think other standards will evolve and do a better job of what’s been mapped out by with the IRS standard over time. So the onus is on us and some of our competitors to make that stuff happen. We feel really good about being first to market with it.

As far as booking fees, that we said historically and we will say again as we go into '16 that we believe booking fees will trend up slightly and I do think that over time the more services that we provide to airline customers then more value that we can provide them or that we can tie out. The notion that we're helping them execute their strategy in driving new revenues, over time that might be an opportunity.

Today, we view it as not a huge revenue producer today in '16. We don’t think it will be for us, we don’t think it will be for any of our competitors and partly because these are pretty nascent services and it is going to take some time to really understand where the value is being driven.

Ryan Kerry

Great, thanks for taking my question.

Operator

We’ll go next to Bhavan Suri of William Blair.

Bhavan Suri

Hey, guys thanks for taking my question, just first start up on everyone has covered the macro, but have you seen any push back in CapEx spending from the airline or hotel customers at all yet.

Tom Klein

No, in fact I would say that its, that airlines in particular our investing in technology at a fairy rate. They are doing that for two reasons, one because they have strategies that cannot be executed unless they invest in technology one reason and secondly, they are obviously flush with cash.

So, we like this environment from a selling perspective. We see airlines making best on systems that are potential longer term returns because they really are trying to put the underpinning of the technology in place to be able to execute the future strategies. And then I talked about our Crew Solutions in my remarks. The operational areas whether it’s re-accomodation or crew are areas that need a refresh from an investor perspective. I also think this kind of cash rich cycle in the airline industry will allow that refresh to happen.

Bhavan Suri

Got it. And then just turning to Europe obviously nice share gains there, as you look at the competitors and where you’ve taken share from did pricing have any impact? And then just a follow-up as you know Ryan had obviously tried to [indiscernible] didn’t work out everything else, but do you worry about airline consolidation because obviously in the U.S. we’ve seen that MEBS [ph] had negative impact overall or pressured at least the GDS a little bit, do you worry about that, do you think that’s a ways away or do you think that's something could be more imminent from a consolidation perspective on the content there?

Tom Klein

Yes well, I mean some of the consolidations played out, I mean the Air France Group and the NICR [ph] really are consolidations, they are not brand consolidations because there is a whole bunch of regulatory in the way of that but there is operational consolidation certainly. And so, I think we’ve seen much of that, that's not to say that there can't be more, but we’ve seen again senior airlines continue to try to get leveraged through consolidation and yes next group with the IAC Group where you have a low cost carrier in a group with the full service carriers.

So it is not always logical how consolidation has happened in Europe. I do think most of it is behind us, but there is always potential for more deals. Our wins in Europe have not been, I mean price is always part of the discussion, but they’ve not been price driven our share. Our gains have been a combination of putting some focus into markets where we frankly hadn’t been before, so we have opened a number of new markets.

We’ve done a very good job leveraging our strength in the online travel market to pick up some business in the regional online markets across Europe and we have the best platform in the world from multinationals and we continue to see primarily North American multinationals globalize travel programs and bring Sabre with them wherever they go and that leads to some international growth and some benefit for us. So I think that's where we won business and not really been price driven.

Bhavan Suri

Got it and then one last one on the optionality side you have the micro stakeout which happened now a while back and you guys have done a nice job of taking share there, I mean your other competitor in Europe has been talking about developing for that group at hotel reservation probably management symptom kind of on prime type of thing. Any update on the competitor environment, any of those guys are starting to change how they come to market, I mean starting to think about approaching sort of a multi turn SaaS model that you have or becoming competitive in pricing, anything new on that environment?

Tom Klein

I feel very good about how we're positioned in go to market versus competitors had some changes, but I don’t know that those changes have been changes that have benefited the customers. So we feel very good about how we're going to market. We think we're having unique conversations with hoteliers in all segments and we just really like that business and think we can continue to drive wins there.

We have work to do as I said earlier to build out some capabilities in areas like property management where at that’s a big market and we're not big in it today, we're nascent in it and we think there's a lot of upside.

Bhavan Suri

Great, that's helpful. Thanks guys, thanks for taking my questions.

Tom Klein

Thank you.

Operator

Thank you. We'll go next to Jed Kelly of Oppenheimer.

Jed Kelly

Great, thanks for taking my question. Two things, one 4Q Travel Network pricing per passenger was down year-to-year. Is there any particular item you could highlight around the decline? And then can you just further touch on what's driving the share gains at the OTAs? Is there anything around Expedia enhancing its airline offerings to call out? Thank you.

Rick Simonson

Yes on that, look that’s really related to Abacus and bringing that on Jed, nothing new there unexpected as we said. And then in terms of…?

Tom Klein

I just think on the OTA side in terms of the larger scale OTAs and we've talked about this before, we are at the back – we're a back end technology provider, they want to spend their money on building out technology that goes out to the customer and I think that the OTAs that had significant scale are starting to be able to invest at levels that are just different from anybody else in the industry including the direct channels. And they just have a model that is giving them more confidence about their ability to convert multiple products into a single customer.

So you could listen to how they talk about their business, but I think it has a lot to do with the scale and the level of investment and the knowledge that they are gaining as far as customer insights in the digital marketing world. And they've been – we've see growth rates from some OTAs not all that are far out shifting the markets.

Jed Kelly

Thank you.

Operator

Let's take our next question from Matthew Bloom of Cowen & Co.

Matthew Bloom

Thanks for taking my call. So I guess just on OTAs and actually also the offline agents, what are you seeing right now on the pricing front?

You mean from an agency and center perspective?

Tom Klein

Matthew Bloom

Yes, exactly right, yes. Exactly.

Tom Klein

Yes, I mean look, we've seen some drift of it in centers where there has been consolidation and the comment that I just made, so just some of the biggest players are growing faster than the market. So you have unit price growth because of that. But from a contract-over-contract perspective, I think in aggregate we see incentives relatively flat in aggregate and that's the same story we've been telling for the last several years.

Matthew Bloom

Okay, perfect, thanks. And I guess just lastly, how are you looking at sort of additional M&A at this stage or are you sort of more long lines and if you've got enough on your plate right now or?

Tom Klein

We have plenty on our plate, but we, yet we're we said before that particularly in the solutions space if we can add acquisitions that will provide new value to our customers or give us access to new customers that we don’t have today, that we're an active acquirer and we think those are, we refer to them as tuck-ins.

They have generally been – Trust was on the larger side of a tuck-in. they've been small as a couple of million dollars, but we're very active in trying to understand what's out there and again we believe that we have a platform that if we can plug in new services to it we can increase share of wallet at our customers. And we can develop globally, deliver globally and sell globally and there is a lot of boutiques out there that just can't get to those bigger markets without being acquired. So we think there is upside for the companies we're acquiring and their employees as well as for us and our customers.

Rick Simonson

And Matthew we've got the capital structure and got the flexibility and strength there to handle those types of acquisitions Tom just reiterated, so thanks for that.

Matthew Bloom

Right, thanks very much.

Operator

And with no further questions, I'd like to turn the call back over to Mr. Tom Klein for closing remarks. Mr. Klein?

Tom Klein

Thank you very much and again thanks for your confidence in Sabre and for joining us today. We look forward to a great 2016 and we look forward to seeing you again and as Rick mentioned we plan on getting out for Investor Day here later this year.

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