Sabre (SABR) Thomas Klein on Q2 2016 Results - Earnings Call Transcript

| About: Sabre Corporation (SABR)

Sabre Corp. (NASDAQ:SABR)

Q2 2016 Earnings Call

August 02, 2016 9:00 am ET

Executives

Barry J. Sievert - Senior Vice President-Investor Relations

Thomas Klein - President, Chief Executive Officer & Director

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Analysts

Brian L. Essex - Morgan Stanley & Co. LLC

Mark L. Moerdler - Sanford C. Bernstein & Co. LLC

David Mark Togut - Evercore ISI

Ashish Sabadra - Deutsche Bank Securities, Inc.

Lara Fourman - Goldman Sachs & Co.

Jason Alan Kupferberg - Jefferies LLC

Jed Kelly - Oppenheimer & Co., Inc. (Broker)

John P. King - Bank Of America Merrill Lynch

Matthew Broome - Cowen & Co. LLC

Parthiv Varadarajan - Mizuho Securities USA, Inc.

Brad Erickson - Pacific Crest Securities

Operator

Good morning and welcome to the Sabre Second Quarter 2016 Earnings Conference Call. Please note that today's call is being recorded and is 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 the Senior Vice President of Investor Relations, Mr. Barry Sievert. Please go ahead, sir.

Barry J. Sievert - Senior Vice President-Investor Relations

Thank you, Hanna and good morning, everyone. Thanks for joining us for our second quarter 2016 earnings call. This morning, we issued an earnings press release, which is available on our website at investors.sabre.com.

The SEC recently issued additional guidance on the use of non-GAAP financial measures. As a result, you will notice a few changes to the presentation and our press release today, including the presentation of our guidance. A slide presentation which accompanies today's prepared remarks is also available during the call on the Sabre IR webpage. 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 related to restructurings, litigation and tax matters, and certain other items.

All references during today's call to EBITDA, operating income, 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 today contain forward-looking statements. These statements include, among others, disclosures of our guidance, including revenue, EBITDA, net income, cash flow, interest expense, tax rate, capital expenditures, and earnings, our expected segment results, the effects of new or renewed agreements, products, implementations and acquisitions. Implementations are 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 first quarter 2016 Form 10-Q and our 2015 Form 10-K.

Participating with me on today's call are Tom Klein, our President and Chief Executive Officer, Rick Simonson, our EVP 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. Rick will then 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.

Thomas Klein - President, Chief Executive Officer & Director

Thanks, Barry. Good morning, everyone. Our second quarter results build on our growing and consistent track record of solid execution. And while the macro environment has offered very little upside, our results demonstrate our ability to grow even in a relatively stagnant environment.

It's also a confirmation that the criticality of our systems, our services, and our strategy continue to add new products and services to our Airline and Hospitality portfolio while we continue to expand the geographic penetration in all of our businesses.

Our team is laser-focused on the things we control, launching in new and innovative products, staying far ahead of our competitors in areas like mobile and cloud, taking care of our customers and finding new ones and ensuring that we have an advantageous cost structure. And while we're never satisfied, we are very pleased with our first set of results and we expect the solid remainder of 2016.

Now, looking at the second quarter results, overall growth rates were very similar to what we reported in the first quarter. Total second quarter revenue increased 20%, adjusted EBITDA grew 19%, and adjusted earnings per share improved 37% from the prior year. And overall, we posted solid growth.

In Airline Solutions, excellent customer growth, new solution adoption by current customers and new customer implementations all contributed in the quarter.

One of our key drivers is our strategy to continue to broaden our offerings. And with some innovations, we're the only ones doing what we do. We've previously discussed how Intelligence Exchange in our retailing and merchandising solutions are helping to bolster growth. And we continue to introduce new innovations that will further enhance Airlines' ability to get deeper insights into the data and create actionable events tailored to specific customers.

We recently debuted four new or upgraded solutions, Digital Experience, Commercial Analytics, Revenue Optimizer and Crew Manager. Sales interest around all four has been strong and our Crew Manager solution has been particularly strong with pent-up demand for richer capabilities.

We've hit the target and have the best crew solution in the market today. We have multiple sales in the second quarter and we have a very deep pipeline of opportunities.

I thought I'd take a few minutes on this call to dig deeper into my comments about our innovation and the criticality of our solutions. To do so, we're focused on crew management, which is one of the most critical and complex areas in an airline. Fuel and labor are the largest expenses for most airlines, so it's essential that airlines plan, schedule and manage their crew as efficiently as possible; regulatory requirements, union provisions, quality life objectives and airline policies, all impact crew management optimization. After this, the importance of rapid recovery from irregular operations due to congestion or weather and you can get a sense of how critical a crew solution can be to overall airline operational efficiency.

Avoidance of both missed crew connections and lack of reserves for backup crew members are two of the largest controllable sources of delays and cancellations for an airline. Our new solution provides a world-class user crew experience for crew planners and crew members alike. Sabre's crew product is very flexible and has a rich mobile capability to serve the airlines remote and mobile workforce who are now enabled to make self-service adjustments while receiving real-time alerts.

Our crew recovery capability leapfrogged the legacy systems being used across the industry. For example, during the recent storm that caused hundreds of flight cancellations, one of our customers use this technology to determine a crew recovery four times faster than current industry benchmarks, saving almost a half-day of operational chaos and putting the airline on a path to recovery. And with the optimized solution produced by our crew recovery system, it took about two days for the airline to return to its steady-state plan from an almost complete shutdown of aircraft movement. That's three times more efficient than current industry benchmarks.

Crew management is a critical component of every airline and one of the biggest revenue contributors within our AirCentre suite. We're already the leader in crew management software which has an addressable market approaching $250 million and growing. It's clear to us that there's pent-up demand for this new best-in-class solution. We already signed multiple deals and we have a rich pipeline of new sales. You should expect the deal flow announcements in the back half of the year.

The great example of Sabre setting new standards out-innovating the industry and working with leading airline customers to create the next industry standard for a big, important part of the market.

In Hospitality Solutions, we also realized strong growth, hoteliers of all sizes continue to be attracted to our growing portfolio of innovative solutions and the great service our team provides. That customer excitement suggests the long runway for continued growth.

As we work to implement Wyndham, we have nearly 1,600 properties running on our SynXis property management platform and we've completed the migration of a few Wyndham brands to the SynXis central reservation platform with very good results. I personally appreciated having keep peers at Wyndham speak in our Investor Day about the decision process that led Wyndham and Sabre and some of the positive results they've already experienced from our solutions.

And we've seen very good sales and implementation activity across the hospitality market. We continue to build on our gap with competitors, with new brands taking advantage of more and more of our hospitality solutions.

In Travel Network, overall booking growth was 24% and our now wholly-owned Asia-Pacific region was a big contributor to growth. But we did see some growth in every region of the world. Despite a tough year-over-year comparison, we delivered modest growth in both North America and EMEA. Latin America bookings growth turned positive this quarter which is very exciting.

And in Asia-Pacific, the end of the second quarter marks the anniversary of our full ownership of the region. Our operations are largely integrated and sales progress has been very strong. Second quarter like-for-like APAC bookings growth were 9%. We're extremely pleased with our progress in Asia-Pacific.

Now, importantly, our confidence in future bookings growth and continued share gains has been solidified with several recent wins and renewals of our largest travel agency customers and they'll have a meaningful impact over the coming years.

We've recently completed new contracts with some of our biggest customers, including Expedia, American Express, BCD and Flight Centre among others. Our approach on these deals is look for ways to add new value to our customers and find ways to refresh the relationship while growing our base business.

The new Sabre Red Workspace is having a big impact on our agency and supplier conversations. And we expect that it could create significant advantage going forward. It's the best agency platform available with differentiating capabilities for airlines and hoteliers to market and sell their products the way that they want.

As you know, ancillary revenue has been the greatest source of revenue growth for airlines over the last several years driving approximately $50 billion or so of industry revenue last year. The large majority of this revenue has been driven through the airline direct channel and the airlines look for new opportunities to drive ancillary revenue. We expect the next slate of growth will be driven through the GDS and Sabre is positioned to lead the way.

Our technology is ready and we believe the commercial willingness is there. In fact, all of the North American majors that offer paid seats are committed to distributing them as well as other ancillaries to the Sabre marketplace. These airlines recognize that meaningful revenue can be generated through our network of travel agencies.

For agencies, the new Sabre Red platform brings important new capabilities, enhance customer service, and optimize their business, including building on our industry-leading hotel room night volumes through the GDS. We previewed the platform in June at our largest customer event of the year and it's generating tremendous positive feedback from agencies.

Sabre Red platform is used by brick-and-mortar sellers to travel and many of the same shopping services, data analytics and our supplier services extend our leading capabilities on the online travel side of the market that largely consumes our web services offering to enable their business. These new capabilities will help drive an accelerated growth and we expect will extend the record of results we've built since our 2014 IPO.

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

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Thanks, Tom. Let me start with the summary where we are to-date and then provide the detail and our reiteration of guidance. Our second quarter results were strong and reflect a continued strength of our business and the stability of our financial model. First half performance has been robust, our momentum is intact, and we expect solid results for the remainder of the year.

Airline and Hospitality Solutions continue to track towards more than $1 billion in revenue this year. For the quarter, revenue grew 16% to $252 million. Contributing to the rise in revenue was an increase in our SabreSonic passengers boarded, growth across our AirVision commercial and AirCentre operational solutions and strong growth in Hospitality Solutions.

Airline and Hospitality Solutions EBITDA increased 14% to $92 million, resulting in Q2 EBITDA margin of 36.5% for the segment.

200 million passengers were boarded using our SabreSonic reservation system, a 43% increase year-over-year. New implementations contributed the majority of the increase. However, passengers boarded growth on a consistent carrier basis was 6% in the quarter.

Turning to Travel Network, revenue increased 21% to $598 million, driven by the impact of now wholly-owned Asia-Pacific region and bookings growth across all other regions. EBITDA increased 22% to $252 million in the quarter. Excluding the impact of consolidating Asia-Pacific, Travel Network saw strong organic revenue growth of approximately 6% in the quarter.

Travel Network's revenue growth was supported by bookings increase of 24% in the quarter and, again, excluding Asia-Pacific, global bookings growth was 2%. This is on top of a challenging comparison of 9% growth in the year-ago quarter.

On a regional basis, North American bookings increased 1.3% in the quarter, driven by good growth in leisure channels while corporate travel remained more muted. In Europe, Middle East, Africa, our long-term trajectory of share gains continues with normal quarterly ebbs and flows. We anniversaried some meaningful customer conversions early in the quarter, which led to 3.2% bookings growth in the region, faster than the underlying market growth, but tempered a bit compared to our terrific Q1 performance. We expect our outperformance in EMEA to widen over the balance of the year, as new conversions in the pipeline are completed in the coming months.

Latin America bookings turned mildly positive in the quarter, increasing 1.5%, including a return to modest growth in Venezuela and Brazil. Globally, our share of GDS bookings in the quarter was roughly flat at 36.7%. Year-to-date, our worldwide share is nearly a full point higher.

Moving to Sabre's overall income statement. Strong growth across the business resulted in a nice rhythm to the quarterly numbers consistent with Q1, revenue of $845 million, an increase of 20% year-on-year; adjusted gross profit of $373 million, a 19% improvement from the same period in 2015.

Total adjusted EBITDA increased 19% to $271 million. Adjusted operating income of $193 million was 19% higher than year-ago results. Interest expense declined by $5 million as a result of our benefits of recent refinancing activity and our effective tax rate was lower at 33%, reflecting the favorable impact of our now wholly-owned Asia-Pacific business and our ongoing tax work.

All this resulted in adjusted net income growth of 37% to $104 million, and Sabre consolidated earnings per share of $0.37, up 37% year-over-year.

Moving to the balance sheet and cash flow. Quarter end total net debt was $3.2 billion, a modest increase from year end reflecting the acquisition of Trust early in the first quarter for approximately $160 million. However, leverage decreased with net debt to trailing 12-months EBITDA of 3.1 times.

Recently, on July 18, we announced the closing of a $1 billion pro rata credit facility. Our recent credit ratings upgrades allowed us to access this attractive market. The facility includes a new $400 million revolver that replaced our previous $405 million revolving credit facility, and a new $600 million term loan A that was used to pay down $470 million of existing and outstanding (17:21) loans and term loan B loans, with additional cash added to the balance sheet to provide incremental liquidity.

Following these actions, our pro forma blended cost of debt now sits at 4.3%; swap adjusted, it's 4.4%. For the quarter, we generated $34 million of free cash flow. Year-to-date, we generated $99 million of free cash flow. Q2 total adjusted CapEx, which is the sum of GAAP CapEx and capitalized implementation cost, was $112 million. Capitalized implementation costs were $23 million of this amount.

So now, let's turn to the outlook for 2016 as we have half the year in the books. We're pleased with our first half performance. We continue to demonstrate the power of Sabre growth model with strong year-on-year and quarter-on-quarter growth, both organically and enhanced by selective M&A.

We've accomplished that in a macro environment that hasn't offered any upside as we move through the year and over the past month or so, has had increased volatility, particularly in the EMEA region.

With this in mind, we continue to expect to report full year income statement measures within our initial guidance range. All considered, we now expect revenue to be towards the lower end of our guidance range of $3.39 billion and $3.43 billion or closer to 14.5%. We expect adjusted EBITDA, net income and EPS to be near the midpoint as we manage the business to deliver against our objectives.

In Solutions, we continue to expect full year revenue growth of more than 17%, with strong top-line growth in both Q3 and Q4. We expect flow through to Airline and Hospitality Solutions EBITDA will be much stronger in Q4 than Q3, reflecting the timing of new implementations in both Hospitality and Airline Solutions expected over the balance of the year and the anniversary of the expiration of the service contract we previously discussed at the beginning of Q4 last year.

In Travel Network, with the anniversary of the acquisition of our Asia-Pacific business on July 1, revenue and bookings growth over the balance of the year will return to normalized growth rates reflecting our global footprint. Incremental economic and geopolitical uncertainty have dampened industry-wide bookings growth somewhat leading us to expect full year Travel Network bookings growth to be about 1% less than our initial estimates.

We expect the increase in full year Travel Network revenue to be around 13.5%, with stronger growth in Q4 versus Q3 reflecting the benefit of upcoming new agency conversions. We previously communicated expectations for full year Travel Network EBITDA margins to be approximately 40%. Given our strong year-to-date performance and outlook for the balance of the year, we now expect to do a bit better than that.

Turning back to consolidated Sabre, we continue to expect full year total EBITDA to be towards the midpoint of our guidance range of $1.08 billion and $1.1 billion. Interest expense should be approximately $40 million per quarter and our full year effective tax rate is expected to be approximately 33% to 34%.

We continue to expect full year net income and EPS growth of around 30%. We expect full year results to be near the midpoint of our guidance for between $395 million and $415 million of net income and EPS of $1.40 to $1.47.

Turning to cash flow, we've made the decision to accelerate certain investments this year to capture some attractive commercial opportunities which will result in an increase in capital expenditure. A meaningful percentage of this investment is directly tied to strong sales activity in Travel Network that has resulted in a number of new agency wins and renewals.

We expect these agreements to drive bookings and sustainable share gains over the coming years, resulting in an expected strong return on invested capital. These are the types of investment decisions that are easy to make with expected clear and strong payback.

As a result, we're adjusting our expectations for 2016 free cash flow to approaching $375 million. With much of the incremental cash usage absorbed in Q2, we expect Q3 free cash flow generation to be relatively consistent with our average across the first half of 2016 and expect a significant ramp up in Q4 this year.

So overall, we continue to have strong revenue, earnings and cash flow growth in a global economic and travel environment which I'd say isn't doing us or anyone others any favors. Our expectation of continued solid performance is a reflection of our business model and our ability to minimize volatility within our results, while external volatility has increased somewhat.

In summary, our second quarter results reflect the continued strength of the business and stability of the business model. First half performance has been strong and with continued momentum across the business. We expect solid results for the remainder of the year.

Back to you, Tom.

Thomas Klein - President, Chief Executive Officer & Director

Thank you, Rick. Innovation of scale and a track record of value delivery to our customers continues to drive our growth. Our employees are innovating in a pace our customers appreciate and that our competitors are finding hard to match. This innovation result in an industry's leading new solutions like the new Sabre Red Workspace, Crew Manager, and Intelligence Exchange that continue to press our advantage in the market.

And with that, I'll ask Hanna to open the call for your questions. Hanna?

Question-and-Answer Session

Operator

Thank you. And we'll go to Brian Essex with Morgan Stanley.

Brian L. Essex - Morgan Stanley & Co. LLC

Good morning and thank you for taking the question. Tom, I was wondering if I could start off by taking a look at the guidance and the commentary that you made on EMEA. If you could elaborate a little bit more in terms of what specifically are you seeing in that region that causes you to be more cautious? Obviously, we're all aware of what's going on in the macro, we've heard some other vendors talk about shifting Travel. Maybe if you can break it down to maybe country specific where you're seeing the movement and what's giving you the incremental pause throughout the remainder of the year? And then, I have a follow-up.

Thomas Klein - President, Chief Executive Officer & Director

Yeah. Brian. So it's a little hard to talk about it on a country specific level. I think our view is that this confluence of issues that have happened whether it's been some of these spate of terrorist issues, and then, just an overall softening of demand, we talked about corporate demand globally being a little bit soft. I think there's a confidence issue that's driving some pullback in capacity in some markets as we've seen and the shifting of capacity. So in some cases, domestic capacity being decreased by here in the U.S. and a little bit of increase on the international side. So we see capacity down a bit.

And Europe coming into (25:19), we've outperformed Europe in a significant way and, as Rick said, we had a quarter here, this quarter where we anniversaried some big wins that we had in Europe or really across EMEA in 2014 and early 2015 that got implemented. And now, we have a little bit of backlog and implementation new travel agencies there and we expect a reacceleration. So we're still outperforming the market by a meaningful amount.

But we're not seeing the double-digit growth that we saw some quarters here over the last – really last several quarters where we've seen big EMEA growth. So I think there is a softening in the macro. But we also had this impact of anniversarying some deals that we had and we expect to again start implementing new business that will pick that back up.

Brian L. Essex - Morgan Stanley & Co. LLC

Got it.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Brian, this is Rick. For us, EMEA is on track and we continue to outperform the market. We'll continue to outperform the market we expect through the rest of the year. So for us, it still is a growth market even given some of these things that have happened to shake maybe confidence a little bit or move travel around the region over the last six weeks or so.

Brian L. Essex - Morgan Stanley & Co. LLC

Got it. And I guess on that sticking with Travel Network, certainly hearing about the wins in the markets, so that's a great thing to see. So congratulations on that. How does the investment driving those wins trickle into the following years? Any adjustment to next year's – historically, you've given a couple of years now of high visibility in the free cash flow growth. Is this primarily 2016 event or should we anticipate this investment to run into next year or perhaps maybe even...

Richard A. Simonson - Chief Financial Officer & Executive Vice President

On the new wins that we talked about that we're investing in now which is a great return and sustained market share, it's primarily 2016 impact, Brian. And so, again, we expect our medium-term outlook for free cash flow is remained constant, and what we're doing, we're investing with wins that gives us sustainable market share growth, we'll have a great return and, again, just it further cements that foundation of global leadership and in the Travel Network business.

Thomas Klein - President, Chief Executive Officer & Director

Yeah, let me – first of all, Brian, thanks for calling out the wins. We renewed our biggest customer, Expedia, to a long-term deal as well as our second biggest customer, American Express, and I mentioned BCD and Flight Centre, two of the biggest travel providers in the world. So it really was a big chunk of activity and, as I said, our approach on these renewals is that on a base business basis, business as usual, we're already renewing these contracts, as we're doing a good job for our customers.

But we're always looking for ways to grow and to find new pockets of opportunity as we work through the renewal and to refresh the relationships. So in some cases, the investments take us into new markets, in other cases, it's to add some capabilities that a customer renewal is telling us, if we add, we'll benefit by getting more business over the longer haul or just by driving more value for them.

So it's again, in actual course of business, this was a unique chunk of business that we had. So many big deals are part of that in a short period of time, happy to have them behind us, but we really do see upside with all those customers as we push out into 2017 and 2018. Rick?

Richard A. Simonson - Chief Financial Officer & Executive Vice President

And if we can accelerate a little bit of CapEx, spend a little bit more of OpEx, it's a great investment in the business. It's what we've talked about repeatedly where we want to put some additional investment in the business when it has that kind of clear sustainable payback.

Brian L. Essex - Morgan Stanley & Co. LLC

Got it. That's helpful. Thank you.

Operator

Next, we'll go to Mark Moerdler with Bernstein Research.

Mark L. Moerdler - Sanford C. Bernstein & Co. LLC

Thank you very much. Rick, drilling a bit more into the increased investment in the Travel Network, two related questions. First one, how should we think about the fees you're paying or the percentages for sales and commissions to the internal employees and the agencies. Is the cost of closing that business changed significantly, whereas basically, the cost of driving that revenue staying reasonably stable and I have a follow-up?

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Reasonably stable. It hasn't changed significantly. And as you see, we're winning business, we're gaining in market share, and we're doing that with having our gross margin and our EBITDA margin actually a little bit higher than what we thought at this point in the year, so that gives us a good flexibility since we're winning on the things that we always say we compete on first, second and third, which is our overall product, the innovations, the ease of use, the end-to-end efficiency for the agencies and all you need to do is be competitive on price.

Mark L. Moerdler - Sanford C. Bernstein & Co. LLC

Perfect. So you're not having to pay more to win. Second question is, I know you've given a little bit of data, but in terms of looking at the large amount of deals that obviously you've closed, can you give us a sense of how much that was – how much of the dollars or some other metric, how much of that is wins versus renewals of deal that you basically were able to close earlier and lockdown?

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Again, as Tom said, we renewed with couple of our biggest ones, and then, there's a couple of wins in there that you guys are I think aware of and we don't call out every single one, I mean we deal with hundreds and hundreds of travel agencies, OTAs, brick-and-mortar, you name and these were rather large, so we called it out here.

Mark L. Moerdler - Sanford C. Bernstein & Co. LLC

Perfect. Thank you. I appreciate.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Thanks, Mark.

Operator

Next, we'll go to David Togut with Evercore ISI.

David Mark Togut - Evercore ISI

Thank you. Good morning. Good to hear of the strong sales activity in the Travel Network business. Could you talk about market share trends in the quarter? In particular, your reported data show a 70-basis-point decline in global air data. It looks like Amadeus was up about 80 basis points on a global basis with the big share gains really occurring in Asia-Pac and North America. I mean, are these just short-term shifts that you think will reverse in the next few quarters or is there something else we should be thinking about?

Thomas Klein - President, Chief Executive Officer & Director

Yeah. Thanks, David. Look, the quarterly rhythm of share is driven by a whole bunch of things including kind of the ins and outs of how different markets are growing or maybe, as we said in our remarks, there's some implementation ebb and flow that happens, but that can drive share.

We really focus on that year-to-date number. We're up almost a full point of share year-over-year the business that we just renewed and signed up and talking about five of the 10 biggest travel providers in the world, all of which we have a very large shares of, in some cases, above 50% shares of some of the biggest players in the world. We think we can expand there. We think that that will lead to longer-term share growth, and we think we have a very advantaged position and more balanced position than our competitors.

David Mark Togut - Evercore ISI

Understood. And then, just shifting gears to Airline and Hospitality Solutions, I think you've called out an intermediate term pipeline of about 650 million PBs that you're pursuing, could you talk about the propensity of the airlines to outsource in this environment as booking slows and perhaps they focus more on ways to reduce costs?

Thomas Klein - President, Chief Executive Officer & Director

Yeah. I mean, we don't think there's any change there. We think the long-term trend that's going to continue. We said that it's early in the enterprise side of the Hospitality market for outsourcing, particularly in the central reservation system, but in the Airline market, we don't see any slowdown or any propensity to change. We think that pipeline still holds. We've said all along that the timing is always hard to predict as far as we can see deals coming, we can see RFPs come out, but we can't always see the finish line as far as when people will make decisions.

But the propensity to buy has not changed, and as I mentioned in my remarks, and in some of the areas where we really nailed a solution like we have in crew, where we clearly have the best product in the market, there is a propensity for people to line up and talk with us about buying it. So I think as long as we do our job and hold up our end of the bargain on innovation and showing carriers or hoteliers a path to a better cost of ownership and an ability to innovate and leverage at scale, I think that that trend is going to continue and we can be a stimulator of it.

David Mark Togut - Evercore ISI

Understood.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Hey, David, this is Rick. I want to add that passengers boarded overall in the industry are still growing and growing quite robustly, I mean, our own on an organic basis just in the quarter we're 6%. And so, and also, I think airline capacity is actually growing and it will be higher this year than it was last year.

So not to be confused with a number of airlines have said they're slowing their rate of growth in the second half a bit. If you remember at the start of the year, we talked about that that could be likely and our guidance expected that, and if it happened, we could play well within it, but I think two things to reiterate is passenger boarding growth is having the typical strong secular growth of the industry that grows faster than GDP, and capacity this year will be higher than it was last year even if some people are pulling back their plans a little bit particularly in Q4.

David Mark Togut - Evercore ISI

Understood. Thank you very much.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Thanks, David.

Thomas Klein - President, Chief Executive Officer & Director

Thanks, David.

Operator

Next, we'll got to Ashish Sabadra with Deutsche Bank.

Ashish Sabadra - Deutsche Bank Securities, Inc.

Hi. I'll ask a question on Solutions. So Solutions growth has been trending like 16% in the first half. You reiterated your 17% guidance for the full year, which would imply a material improvement in the back half. So I was just wondering how much visibility do you have around that and what are the drivers for improvement in the revenue growth in the back half.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Yeah, Ashish, it's Rick, thanks. You got it right. We will have a stronger growth there and, as I mentioned, more so even in Q4 than Q3, just on quarterly seasonality. And we still expect the 17% growth for the year; so all the numbers are intact.

And again, it's really just a good visibility on what we have, particularly in Hospitality as that becomes a bigger portion of our business. And in Airline, of course, we have across really three suites of product our SabreSonic reservation suite, our AirCentre and AirVision, so it's really a combination of those. And if you look at those three, and then Hospitality, it's really much more balanced across those than say two years ago where we were a little bit more reliant on just airline reservations, the SabreSonic suite.

So given that, all of those have attributes of where we have strong predictable sales pipeline, implementation pipeline that is we have history with reliable, if airlines have some adjustments to that, we move somebody up, we move somebody back. So we feel pretty good about it; no different now than what we felt in terms of the visibility predictability that's since we came public other than we're a little bit more balanced in those four suite of products, the three across Airlines and then Hospitality in totality.

Ashish Sabadra - Deutsche Bank Securities, Inc.

Thanks for the color, Rick. And then, on the GDS side, the booking fee, if I just divide the transaction revenues by the GDS booking, the booking fee improved like 4% year-on-year that was a significant acceleration than what we've seen historically. Can you just talk about the pricing trend, what's driving that, is it mix shift? What's really driving the pricing increases and the sustainability of those pricing increases going forward?

Thomas Klein - President, Chief Executive Officer & Director

Rick and I both liked your question. I'm going to take it.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Tom, take it away.

Thomas Klein - President, Chief Executive Officer & Director

Look, there's always a little bit of – when we see that kind of gain, a 4% gain, there's definitely some mix shift in there. As we said, we had a strong Asia growth, Asia-Pac growth quarter versus the rest of the world. We saw return of growth for Latin America and we saw a little bit of growth in Latin America where booking fees are a little higher than North America.

And as we said all along, we expect as we renew contracts with our supplier base that we should see moderate price increases, we've talked about it about the rate of inflation, so – and that's what we're saying. So the combination of mix and a little bit of renewal uplift is what's driving that. We haven't kept October too far, Ashish, but we get to see a good quarter from an average price perspective.

Ashish Sabadra - Deutsche Bank Securities, Inc.

Okay, thanks.

Operator

Next, we'll go to Jim Schneider with Goldman Sachs.

Lara Fourman - Goldman Sachs & Co.

Good morning. This is Lara Fourman stepping in for Jim. I was just wondering on margins, you spoke a little bit on the guidance, but can you just give us a sense of what timeframe you think the Travel Network margins can get back to 42% once you optimize Abacus?

And then, on the Solutions side of the business, as your new solutions wins come on next year, do you think it's reasonable to expect another 100 bps of margin expansion in that segment?

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Hi, Lara. This is Rick. Thanks. Just a reminder, in Travel Network, we said for our medium-term guidance that it's around 40%, not 42%. We moved the 42% down to 40% with the full integration and acquisition of Abacus, it was the primary driver for that.

What I pointed out in Q2 and for the rest of the year is we're actually doing a little bit better this year than what we expected. So we're in between that 40% and 42%. But again, we expect that to be closer in the medium-term to 40% than 42%; that allows us to have the right kind o flexibility to invest for total revenue growth, total margin growth, and total free cash growth that maximizes the business.

I think we're demonstrating we're playing that well. We'll be in between those ranges a little bit here this year and next, but that's just a reiteration of what we look a little bit further out. Real happy with the performance of Travel Network in the first quarter and second quarter to-date.

On the Solutions side, again, as we've talked about this year, in the high 30%s. We're tracking to that. Quarterly, you have some variation here, as we've seen in Q1 and Q2. And then, we pick up a bit, and then, moving forward, we had said previously that 2017 would be at the very high end of the 30%s. That wasn't a limit. We talked at our Investor Day where we updated our medium-term outlook and expectations, and say, we have visibility from there into the low 40%s margin on the Solution business. Again, I believe we remain intact for meeting those expectations.

Lara Fourman - Goldman Sachs & Co.

Thank you.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Thank you.

Thomas Klein - President, Chief Executive Officer & Director

Thank you.

Operator

Next, we'll go to Jason Kupferberg with Jefferies.

Jason Alan Kupferberg - Jefferies LLC

Thanks, guys. Just wanted a finer point on the market share trends and expectations. I know you're up almost 100 bps year-to-date in the metric and obviously be quite lumpy on a quarterly basis. So based on the recent new wins, are you suggesting that when all said and done for full year 2016, you expect some meaningful global improvement in overall GDS share, I mean whether that ends up being 50 bps or 100 bps, but some sort of meaningful number once we sort through all the quarterly fluctuations?

Thomas Klein - President, Chief Executive Officer & Director

We have said that we can consistently grow share. We hadn't forecasted out where our share will land, but we've said we will be a consistent grower and we still believe that. So we'll stand at that. We think we take share everywhere in the world. And yeah, there are some quarterly ups and down, but we expect overall that our trend line will go up.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Yeah. And Jason, the new wins are a little bit – will lag a bit. So it doesn't have a big impact on our expectations this year. This year remains intact with or without those, and then, just another thing, as I say, it cements the foundation going forward as I mentioned in terms of just our proof points around the sustainability of incremental sustainable profitable market share growth.

Jason Alan Kupferberg - Jefferies LLC

Okay. And any update on the progress of the CEO transition?

Thomas Klein - President, Chief Executive Officer & Director

Yeah, I think we've commented as much as we ought to. We said we had a window here that we feel comfortable with and we're working through that process.

Jason Alan Kupferberg - Jefferies LLC

Okay. And just last one for me, I mean I know you guys don't normally breakout Solutions between Airline and Hospitality, but anything you've been qualitatively – you can tell us in terms of relative size and growth rate, and just kind of given especially all the rapid growth in Hospitality recently?

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Well, we've broken out those in our K and you can see those and do the – we've got the math of that of what last year was and, again, as we said, in overall Solutions growth, we expect the Hospitality to be growing faster than the average of those two and that's the case. So everything intact on there, nothing to add from what we've talked about before, Jason.

Jason Alan Kupferberg - Jefferies LLC

Okay. Very good. Thank you.

Thomas Klein - President, Chief Executive Officer & Director

Appreciate it.

Operator

Next, we'll go to Jed Kelly with Oppenheimer.

Jed Kelly - Oppenheimer & Co., Inc. (Broker)

Great. Thanks for taking my question. On the macro environment, is there a difference between business and leisure travel trends, and what business, in particular, is some of the softness more of an issue of people paying down on overall ticket value instead of suspending trips?

Thomas Klein - President, Chief Executive Officer & Director

Yeah, well, the answer is yes. We see more of a softness on the business travel side. And I think there's been softness in segment specific areas. You certainly have seen now a multi-year softness in the energy sector where I would say the trips went away not looking for cheaper fares. I think companies always look for the best available fares on the trip that's needed, and in our world, doesn't matter whether they – in fact we want to help them find the best available fare for the trip.

So we're not sensitive to those price fluctuations on the Airline side. We get paid on a per booking basis. But energy sector trips went away; in the financial sector, trips have also gone away. So yeah, there's been a lot of cost-cutting as banks and – banks in particular had earning shortfalls and they cut cost and travel is one of those expenses that is early in the queue when broader cost-cutting is going on.

So that's primarily the big sectors that we've seen, but in the U.S., it's been soft now for quite a while on the business travel side. I think that flows into the big corporate markets around the world as well. So not of anything new there, I think the only – the new thing around the macro is, as Rick mentioned, a pullback in capacity. Capacity will still grow, but we see Airlines pulling back some of that capacity growth that they forecasted coming into this year.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

And Jed, this is Rick. On the leisure side, yeah, there is good growth and particularly in North America market, you're seeing the dynamic that we talk about in the businesses. Airlines are using price selectively on markets to keep their planes very full. So you see the load factors continue to be very high. They use the price particularly primarily on the leisure to stimulate that demand. Again, that doesn't flow through to us, because we get paid on a per booking fee and that's the beauty of this model. And we're seeing that work, and we pick that up through our great position, for instance, like Expedia, the biggest air travel booker in North America and they pick up a leisure and they also have a business side, Egencia. So we see it both ways there.

Jed Kelly - Oppenheimer & Co., Inc. (Broker)

Thank you.

Operator

Next, we'll go to John King with Bank of America.

John P. King - Bank Of America Merrill Lynch

Yeah. Thanks, guys and good morning. Quick question on Abacus if I can, can you just update us there in terms of how the integration is going and any sense around I guess the like-for-like bookings growth you're saying there, I guess, historically, Abacus lost a little bit of share before you acquired it, have you been able to stabilize that at all as of yet or just some comments around that. Thanks.

Thomas Klein - President, Chief Executive Officer & Director

Thanks, John. This is Tom. Yeah, the operational integration is largely complete. We have some continued things that we have to do, but for the most part, I think the big chunks are complete. And we've been extremely pleased with the go-to-market side and our ability to manage customers and sell in the market. We saw share gains in the first quarter. We've held steady here and we believe that we will see future share gains there.

So I mean I'd like to have the same steady growth in market share in Asia-Pac as we've had in EMEA, that should be our expectation over time. And I think we have – our view has been that we have even more opportunity there, because we knew that the joint venture had some weaknesses and how went to market – and the consistency of how they went to market across the geography.

So we feel very, very good about our position there. I mentioned these five customers I mentioned are global customers and we expect, in some cases, to have the growth be in that Asia-Pac region. We have a little bit of work to get it done, but we expect to see the growth there.

John P. King - Bank Of America Merrill Lynch

Great. Thank you.

Thomas Klein - President, Chief Executive Officer & Director

Thanks, John.

Operator

Next, we'll go to Matt Broome with Cowen & Company.

Matthew Broome - Cowen & Co. LLC

Hi, thanks for taking my call. It sounds like you're very positive about the opportunity for crew management. Could you maybe discuss the competitive landscape for that product and when you think it might become a meaningful revenue stream?

Thomas Klein - President, Chief Executive Officer & Director

Yeah. I mean we're already the leader in space. I mentioned it's about a $250 million TAM in the crew area, and we started – we had very good traction. We talked before that Singapore Airlines is our large customer in the Asia-Pacific region. We've had a number of Asia-Pacific deals coming behind that including Garuda in Indonesia, Lion Air Indonesia, we have some other business that we'll talk about as we get further into this quarter that will close in the Asia-Pac region. We've had North American business closed recently.

From a competitive landscape perspective, there are a lot of legacy crew systems out there. This is still a solution that in many cases the biggest airlines in the world is sitting in a very legacy environment. Airlines don't like to touch the crew system necessarily, because there's this issue, as I mentioned, very complex, it's driven by a variety of work rules that come from governments, global regulators, as well as work rules driven by contracts.

So it's a complicated area, and it impacts big part of your cost base and a big part of your employee base. So changing it is not simple, but as I said, we're benchmarking, in some cases, two times or three times better than some of the legacy benchmarks out there. So we expect to get big traction here in the market. Competitively, we have the best solution in the market; we've validated over and over again in the sales process.

And I'm just very bullish. Like we mentioned this morning, as an example, when you're benchmarking two times and three times faster than competitors and can save an airline days of an operational recovery, the dollars in that cost justify the purchase of the solution and the cost of the change pretty easily if we do our job in teeing it up with the airlines. So very bullish on it. We'll see revenue growth there this year and certainly into next as we announce bigger – not just diversity and regional deals, but I think bigger and bigger carrier deals.

Matthew Broome - Cowen & Co. LLC

Okay, great. And I suppose just in terms of the Trust, could you just give us an update on how the integration there is going and is it still on track to contribute $40 million of incremental revenue this year?

Unknown Speaker

Hey, Rick, this is Matt (51:08). The answer is yes and yes, all good.

Matthew Broome - Cowen & Co. LLC

Perfect. Perfect. Thanks very much.

Thomas Klein - President, Chief Executive Officer & Director

Thank you.

Operator

Next, we'll go to Abhey Lamba with Mizuho Securities.

Parthiv Varadarajan - Mizuho Securities USA, Inc.

Yes, thanks. This is Parthiv sitting in for Abhey. Just a follow-up on a previous question. The incremental CapEx for the year related to Travel Network, I think you mentioned that the incentive rates have stayed about the same. Can you give us any additional insight into what that marginal spending in 2016 entails?

Thomas Klein - President, Chief Executive Officer & Director

Yeah, I mentioned – this is Tom. I mentioned that as we renew these deals, we look for opportunities from our customers for growth. Sometimes that's how we can serve them better, new functionality, sometimes it's what we need to do to take them into a new market, and this is a little bit of both of those. There's some deals where we have very big upsides to move business our way based on some requirements that our customers talk to us about. In some cases, it's acceleration of roadmap. So it's not necessarily new things, but things that we're pulling in quicker to get at these new bookings quicker.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Yeah. This is Rick, Abhey – excuse me, Parthiv. It will enhance our overall offering. It's not just specific to this new customer win that's driving the acceleration. It benefits the whole Sabre Red Workspace platform.

Parthiv Varadarajan - Mizuho Securities USA, Inc.

Okay. Great. Thank you.

Thomas Klein - President, Chief Executive Officer & Director

Thank you.

Operator

Next, we'll go to Brad Erickson with Pacific Crest Securities.

Brad Erickson - Pacific Crest Securities

Hi. Thanks for taking my questions. Just a couple follow-ups. You mentioned you're seeing some of these airlines give on price in certain markets to maintain load factors, but obviously, calling out an overall sort of more muted bookings environment. So I guess the question is, are you seeing any elasticity associated with those pricing actions by airlines or is that something that still maybe on the come?

Thomas Klein - President, Chief Executive Officer & Director

Look, I think the industry has a long-term capability to figure out how to fill seats with low prices. I think the ebbs and flows of that varied by market, in some markets, airlines have held onto price a little longer than we expected them to. That was true coming into the summer. So we are seeing price stimulate demand in other markets. Now, but overall, we've talked about a relatively low growth macro, and that's what we're seeing. But I do think as airlines continue to add capacity, which again, they are doing, just at a slower rate than we expected, they will use price to fill up those seats.

Richard A. Simonson - Chief Financial Officer & Executive Vice President

Brad, this is Rick. It's working as it should. They've got the financial strength and flexibility to do it. It's keeping their load factors up, yeah, it hits the PRASM a little bit, but all good, and for our business, it's working the way it should in the way we like it and gives us that both growth and stability.

Brad Erickson - Pacific Crest Securities

Got it. And then, can we just get an update maybe on changes you've seen lately? Thanks.

Thomas Klein - President, Chief Executive Officer & Director

Yeah. As I said earlier, our share year-to-date is up almost a full point. We expect that to continue to grow, and, again, I would feel like we can take the share globally, and we showed that in the first quarter where we had growth in all four regions of the world and that's our expectations that we're going to have an upward share, Brad, over a long period of time.

Oh, and direct versus indirect, there's not really anything new going on there. We said that we felt like the direct and indirect moderate. And as I mentioned in my remarks, this notion around where ancillary revenue is coming from $60 billion of revenue last year, the large majority, when we say large majority, I mean up in the high 80-percentile low 90-percentile of revenues on the ancillary side are coming through the direct channel.

Now, some of that is sold at the airport and will continue to be sold at the airport. So things like booking – I'm sorry, baggage fees, primarily are going to be an airport purchase. But as airlines look at what they've done with ancillaries on their direct sites and what they can do next, next isn't necessarily more products on their direct site, next is driving those products through travel agencies and sending travel agencies to sell them and pushing them through indirect channels.

The technology is there to do that. There has to be some changes around how the airlines think about pushing those ancillaries through, because much of the indirect channel business has many in the ancillaries bundled in. You have people buying higher fare classes than already have many in the ancillaries bundled in, so they have to be more savvy about how they push those offers out. But we've built that technology to let them do that, and as they look at where the next chunk of ancillary revenue comes from and our conversation with them, they believe it's going to be in the indirect channel.

Brad Erickson - Pacific Crest Securities

Got it. That's helpful. Thanks.

Thomas Klein - President, Chief Executive Officer & Director

Thank you.

Operator

And that concludes today's question-and-answer session. I would like to turn the call back over to Mr. Tom Klein for any closing remarks. Mr. Klein.

Thomas Klein - President, Chief Executive Officer & Director

I just want to thank everybody, again, for joining us and wish everybody a good remainder of what's left of the summer. We appreciate your interest in Sabre. And we look forward to seeing you face-to-face or talking to you soon. Thanks so much, and good afternoon.

Operator

And this concludes today's conference. Thank you for your participation and you may now disconnect.

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