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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the Sabre Second Quarter 2018 Earnings 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 Corporate Communications and Investor Relations, Mr. Barry Sievert. Please go ahead sir.
Thank you, Christina, and good morning, everyone. Thanks for joining us for our third quarter earnings conference call. This morning we issued an earnings press release, which is available on our website at investors.sabre.com. The slide presentation, which accompanies today's prepared remarks, is also available during this call on the Sabre IR web page. A replay of today's call will be available on our website later this morning.
Throughout today's call, we'll be presenting certain non-GAAP financial measures, which have been adjusted to exclude certain 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 for non-GAAP measures are available in the earnings release and other documents posted on our website at investors.sabre.com.
We'd like to advise you that our comments contain forward-looking statements. These statements include, among others, disclosures of our guidance including revenue, EBITDA, operating income, net income, EPS, cash flow and CapEx, our expected segment results, the effects of changes in accounting standards and U.S. tax reform, and the effects of new or renewed agreements, products and implementations, 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 2017 Form 10-K and our second quarter 2018 Form 10-Q.
Participating with me on today's call are Sean Menke, our President and Chief Executive Officer; and Doug Barnett, Executive Vice President and Chief Financial Officer. Sean will start us off and provide a review of our strategic and commercial performance and outlook. Doug will offer additional perspective on our financial results and the forward outlook. We will then open the call to your questions.
With that, I'll turn the call over to Sean.
Thanks, Barry. Good morning, everyone, and thank you for joining us. Today, I am pleased to report solid third quarter results that provide continued evidence of growing momentum behind our strategic and commercial initiatives. We continue to build on our efforts for the past 18 months and are focused on growing our position as a global technology leader serving the large and growing travel industry. We benefit from a transaction-driven business model with recurring revenue driven by continued volume growth at our customers across the travel ecosystem.
The Sabre team is highly engaged and I want to thank all of them for their continued efforts. I'm seeing solid progress on all fronts from our platform development and cloud migration to innovation and customer engagement. We are partnering closely with our customers and winning in the marketplace, as evidenced by our third quarter bookings share gain of over 2 points. In the quarter, we delivered 8% revenue growth, 26% EPS growth and 17% growth in free cash flow.
Let's take a moment and review each of our business units. Travel Network posted strong top line growth of 11%, with bookings gains in Asia Pacific, North America and EMEA that included solid growth in both air and lodging, ground and sea. We are the number one seller for hotel inventory through the GDS with approximately 50% share. With our new innovations and partnerships with leading digital travel platforms like Booking.com, we are providing what our customers are asking for and further strengthening our leadership role.
During the quarter, we were designated NDC-certified level 3 as an aggregator by IATA, which complements our existing NDC level 3 capability as an IT provider. We also officially kicked off our Beyond NDC partner program in close collaboration with industry leaders from across the airline and agency communities. We are working closely with these partners on the solution design process and in beta testing capabilities to bring NDC-enabled solutions to market that serve the entire ecosystem.
Airline Solutions saw modest top line growth, a bit ahead of our expectations with solid growth in AirCentre and AirVision and a 6% passenger boarded growth dampened by a decline in SabreSonic services and other professional services revenue. Notably in the third quarter, we renewed Aeroflot's SabreSonic and AirVision solutions, securing a long-term deal with our second largest Airline Solutions customer.
Recently, Airline Solutions efficiently launched the Sabre Commercial Platform with Aeroflot, Etihad and Ethiopian Airlines as initial launch partners. It's the biggest upgrade at our SabreSonic and AirVision suite in over five years. The new platform is a game changer in enabling airlines to offer and sell their products and services across all channels with advanced capabilities, supported by new and industry-first pricing and revenue management capabilities that we believe put us in a great competitive position as we look ahead.
Hospitality Solutions revenue increased 3%. This was below our expectations as solid reoccurring revenues driven by our SynXis platform were again offset by lower year-over-year digital marketing services revenue. With that said, we continue to make strong progress on the commercial and innovation fronts. Hospitality Solutions had a strong sales quarter that was well above plan for our core SynXis software and services business and we believe the pipeline remains robust.
We also announced our new Business Travel Services Suite, a consolidated new solution suite that answers hoteliers' need for a more holistic approach to the management of corporate hotel RFP management. IHG is partnering with us, an early adopter of the new solution, demonstrating our ability to surround and embrace existing central reservation and property management systems from other providers.
Overall for Sabre, our third quarter results were strong and ahead of our ingoing expectations. With our third quarter outperformance and consistent expectations for the fourth quarter, we believe we are well-positioned to deliver a strong full year financial results. Because of this, we are increasing our full year guidance.
With that, I'll turn the call over to Doug to get into more of the financial details. Doug?
Thanks, Sean, and good morning, everyone. Before we jump into the quarterly results, I want to take some time to share my initial thoughts on Sabre. Over the past three months I've taken a deep dive into our business. What surprised me the most is that the vast majority of our revenue is recurring. We benefit from a transaction-driven business model with recurring revenue driven by continued volume growth at our customers across the travel ecosystem, which we believe gives us a natural long-term tailwind and provides confidence in our overall revenue outlook.
Just looking back over trailing 12 months, we generated $3.6 billion in recurring revenue, an increase of 8% year-over-year. Over that period, recurring revenue represented 94% of total revenue. Our recurring revenue streams have grown faster than our nonrecurring revenue over recent years and, as a percent of total revenue, increased 20 basis points year-over-year. You can find our definition of recurring revenue in the appendix of our earnings presentation.
I've also been pleasantly surprised by the amount of data we have at our fingertips to make decisions on a daily basis. We are using this data to evaluate potential new metrics and KPIs that are consistent with those of other best-in-class software companies, providing additional insight as we manage the business. This includes recurring revenue.
Such a high degree of recurring revenue reinforces the need to focus on controlling costs within our business. As a tech company, controlling technology hosting costs and seeking a higher return on our R&D investment are a given. Accordingly, starting this quarter, we'll be providing increased visibility into our technology spend to give you better clarity on the level and performance of these costs, both operating and capitalized, which I'll discuss more in a moment.
Turning back to the Q3 results. Revenue growth was strong, up 8% year-over-year. Over the period, recurring revenue represented 93% of total revenue consistent with the prior year. EBITDA grew 6%. And operating income increased 3% year-over-year, reflecting a little bit of margin pressure from Travel Network incentives and increasing technology hosting expenses. I will talk more about this when I review our technology spend.
Additionally, D&A increased $10 million in the quarter, driven primarily by an increase in previously capitalized technology spend. Earnings per share increased 26%, reflecting operating income growth and a lower tax rate due to the impact of U.S. tax reform. And free cash flow grew 17% to $121 million in the quarter.
Looking a bit closer at Travel Network in Q3. Total revenue growth of 11% supported an increase in operating income of 6% for the quarter. Bookings grew 8% in the quarter, reflecting a supportive global macro environment across most regions of the world. Global share gain driven by the completion of the Flight Centre migration, an increased share at large travel management companies, including the implementation of our new strategic agreement with CWT, as well as the conversions of other new agency customers.
Average booking fee increased 3% in the quarter driven by a 2 point positive mix impact primarily from faster growth in Asia Pacific, a higher-value region; and a 1 point net positive impact from customer pricing at specific carriers experimenting with different distribution strategies in Europe.
As expected, Travel Network EBITDA and operating income grew a bit slower than revenue. Travel Network operating margin declined 110 basis points and was driven by approximately 350 basis points of margin decline from incentive fee growth and 1 point of negative impact from higher technology operating expenses. This was partially offset by a 2 point benefit from the increase in average booking fee and a 2 point benefit from leverage in head count-related expenses, primarily as a result of the cost savings initiative implemented last August.
Incentive fee growth in the quarter was driven by two-thirds of the increase was from new commercial deals and agency conversions, and one-third was due to normal incentive growth consistent with historic growth in the low to mid-single-digits including the impact of agency consolidation. We expect the incentive fee rates to start to normalize and grow in line with historic growth rates in the second quarter next year.
Bookings increased 8%, reflecting air bookings growth of 8% and lodging, ground and sea bookings growth of 7%. Within lodging, ground and sea, hotel bookings specifically grew in the low teens in the quarter. Q3 bookings growth was supported by an increase of 18% in Asia Pacific, driven by agency conversions and strong market growth.
Bookings increased 8% in North America, driven by increased share at large global travel management companies, including the implementation of our new strategic agreement with CWT, and a favorable comparison against a much heavier hurricane season during Q3 of last year in North America.
EMEA bookings grew faster than the market at 4%. Bookings declined in Latin America due to the unfavorable macroeconomic factors in the region. In total, global bookings share increased 210 basis points in the third quarter to 38.6%.
Airline Solutions. AirVision, AirCentre revenue grew 6% in the quarter. SabreSonic revenue was flat year-over-year, with the completion of the SabreSonic implementation at LATAM last quarter, modest consistent carrier growth and flat SabreSonic PB rate, offset by a decline in nonrecurring SabreSonic services revenue. Other nonrecurring discrete professional services revenue also declined in the quarter.
The net impact of adopting ASC 606 drove a $2 million year-over-year revenue increase in the quarter. We successfully more than offset the 606 headwind in the quarter through upfront revenue recognition of $12 million from new license fee implementations and renewals, a reflection of improved customer relationships, resulting from our focus on stability, product health and new innovation.
Airline Solutions operating margin declined 550 basis points in the quarter, driven by approximately 4 points of pressure from increased technology expenses and 2 points of pressure from depreciation and amortization growth of 12%, or $5 million, partially offset by a point of head count-related expense leverage from cost savings initiatives. Passengers boarded increased 6% in the quarter. On a consistent carrier basis, passengers boarded increased 1%, due to flat or year-over-year declines at specific carriers.
SynXis software and services revenues increased 9%, while digital marketing services revenue declined $3 million in the quarter. The decline in digital marketing services was driven by an unfavorable comparison versus the completion of large projects in the year-ago period.
Not closing digital marketing services businesses that we expected to led to lower Hospitality Solutions growth than was expected in the quarter. Hospitality Solutions operating margins expanded 70 basis points due to the mix shift towards higher-margin recurring revenue and cost reduction initiatives. Additionally, D&A increased 27% or $2 million in the quarter.
Starting this quarter, we are providing additional clarity on our technology expenditures. It is important that you understand this category spend especially as we continue the technology evolution that we talked about at Investor Day. Our total technology spend includes the costs we incur for hosting and third-party software as well as R&D.
When referencing R&D, we are referring to our department organization and all activities they perform including research, development and maintenance activities. We capitalize a significant portion of development costs and amortize those costs generally over three years. The development that we capitalize is included in CapEx.
In Q3 2018, total technology spend was $254 million. Of this, $73 million was capitalized and is included in CapEx on our cash flow statement. Additionally, we amortized $73 million of previously capitalized technology costs. Therefore, we spent $254 million on technology in the quarter and also have $254 million of expense impacting our operating results. So how does this compare to the prior year?
Total technology spend was up 5% this quarter versus $241 million in Q3 of 2017, representing growth slower than revenue. This increase was driven by higher technology hosting expense, which I will provide more detail on shortly. The amount of total technology expense running through our income statement in Q3 2018 went up by $22 million, or 9.7%, which is above our revenue growth in the quarter. This is due to the increase in technology hosting expense and a $9 million increase in amortization of previously capitalized technology spend.
Year-to-date total technology spend is up 6% year-over-year versus year-to-date revenue growth of 8%. This demonstrates the leverage that we are gaining as a result of improving our stability, security and product health. The increase in total technology spend is primarily driven by an increase in technology hosting expenses, including a significant decline in third-party hosting service provider credits related to meeting volume minimums. This has caused a headwind of $33 million year-to-date and $12 million in Q3. As a reminder, on a full year basis, a credit step down from $58 million last year to approximately $15 million this year and go away next year. These service provider credits also impact both EBITDA and free cash flow.
The R&D supporting, our cloud migration and cloud-related software is not capitalized. This has resulted in a 530 basis point decline in capitalization mix year-to-date. This mix shift is the driver of the $27 million decline in capitalized technology spend. Although neutral to free cash flow, this impacts operating income and EBITDA and is what we mean when we refer to the OpEx-CapEx rotation.
Finally, the increase in amortization of previously capitalized technology spend has resulted in a $32 million headwind to operating income. This is of course neutral to both EBITDA and free cash flow. Excluding the third-party hosting service provider credits, the decline in capitalization mix and the increase in amortization, year-to-date operating margin would have increased 160 basis points from 18.7% in 2017 to 20.2% in 2018.
In Q3, we generated free cash flow of $121 million, growth of 17% year-over-year. Our cash flow supported the continued strengthening of our balance sheet and we ended the quarter with a leverage ratio of 2.7 times. In the quarter, we returned $38 million to shareholders through our regular quarterly dividend.
With our strong third quarter and consistent expectations for the fourth quarter, we believe we are well-positioned to deliver strong full year financial results. Because of this, we are raising our full year 2018 guidance. For the full year, we are increasing our revenue guidance. We expect revenue of between $3.85 billion to $3.88 billion, representing growth of 7% to 8%.
At Travel Network, we expect stronger full year revenue growth of between 9.5% and 10.5%, above our previous guidance of 6% to 8% and significantly higher than our initial guidance of 4% to 6% coming into the year. We now expect full year bookings to increase 6% to 7%, supported by a solid global macro environment and stronger share gains than originally expected coming into the year, driven by the completion of the Flight Centre migration in Q1, increased share at large global travel agencies and other new agency conversions.
Additionally, we have revised expectations for average booking fee growth to approximately 4% for the full year. This is due to favorable pricing at specific carriers in Europe, and better mix benefit than our original expectations.
At Airline Solutions, we also expect an improvement in revenue growth from previous expectations. We now expect full year revenue to be flat year-over-year versus previous expectations for a low single-digit decline and original expectations for a mid-single digit decline coming into the year. Our stronger product health and customer relationships have led to higher rate of renewals than we expected coming into the year.
Because of this, we expect to offset a large portion of the negative impact associated with the adoption of ASC 606. We now expect the full year impact of adopting 606 to drive a $10 million net year-over-year headwind, with a $40 million gross revenue reduction, offset by approximately $30 million of upfront revenue recognition from license fee renewals and new implementations. In Q4 specifically, we expect the impact of ASC 606 to drive a $7 million net headwind to revenue growth.
At Hospitality Solutions, we expect revenue growth to accelerate in Q4, but now expect full year revenue growth in the high single-digits, driven by double-digit SynXis software and services revenue, partially offset by a decline in digital marketing services revenue.
Now back to the consolidated level. We are increasing our expectations for the full year adjusted EBITDA to between $1.1 billion and $1.13 billion. Our technology evolution is progressing a bit faster than we expected coming into the year. As I mentioned earlier, the R&D supporting our cloud migration and cloud-related software is not capitalized and therefore hits our P&L instead.
We're increasing our full year adjusted operating income expectation to between $695 million and $705 million. We are placing products into service a bit faster than we expected coming into the year and now expect our full year depreciation and amortization to total $420 million. We have raised our expectations for adjusted net income to $415 million to $425 million, which incorporates expectations for full year effective tax rate of approximately 23%, lower than previous expectations. This all results in updated full year adjusted EPS guidance of $1.49 to $1.54.
Finally, we continue to expect full year free cash flow of approximately $425 million. The amount of renewal activity this year as well as a decision to accelerate pension funding has increased our expectations for full year working capital drag.
Sean, back to you.
Thanks, Doug. Before we open it up for Q&A, I do want to take a moment, so sort of summarize some of the things that I see taking place. And I think it's good to put it in a perspective of, really, what we talked about in Investor Day earlier this year. And one of the important things that I continue to be very impressed by is the Sabre team and what they're getting accomplished. We had set high expectations of what we wanted to do in 2018. And without a doubt, the team has continued to perform.
And I just want to go through some of the things that we had discussed at Investor Day and where I see us standing. So the one thing that we had talked about is our investment and focus on product and stability. And I'm very happy to report that what I'm seeing really throughout the year and on the second half of this year, really the best performance that we have seen over – in five years as it relates to our ability to monitor, understanding what's happening with our systems. So a real call-out to the teams that have been focused on that.
The other is the cloud migration and it is well underway. And just to give you a couple examples, if you look at DXC, our peak with DXC was really in the fourth quarter of 2017. And if you look at where we are right now, we've actually reduced – and I'll do this from a server perspective – we're down about 2%. But the important thing to understand is if you look at the growth in essentially the shopping that was taking place and other processing, if it had gone down that – continued to go down that path, we would have probably been up in a server count by approximately 25%.
But here's another data point. If you look at mid-range computing through DXC, in December of 2017, we were sitting at about 66%, that is now reduced to, in the third quarter, to 51%. And based on our estimates, as we look into the fourth quarter, that will drop into the low 40s. So, again, good progress taking place as it relates to our cloud migration.
If I look at TN, I have to be honest, I think they're hitting on all cylinders right now. I'm happy with what we're seeing from a share growth perspective. I'm happy with what we're seeing from the agencies and the airlines, the engagement and what's taking place. And if you look at what we did with the relationship of Flight Centre Travel Group and the recent announcement with CWT, again, a number of things taking place there that I see really good strength.
Airline Solutions, significant progress across the board. As Doug mentioned, we've had a number of renewals in the year that really have set us up well, a lot a focus on the product advancement and what's taking place. So again, they had done a good job.
If I look at Hospitality, outside of just really digital underperformance, we feel good about what's taking place. If you look at SynXis and the platform performance, it's in line with expectations that we have. And again, as we've outlined in this conversation, we feel good about the pipeline and what's going on.
And finally, just I'd like to talk about the executive team. As we look at the new members that have been coming onboard, they're ramping up quickly and really building off of the foundation that we've been setting up over the last 18 months.
And with that, operator, I'd like to open up the call for questions.
Thank you We'll take our first question from Mark Moerdler with Bernstein Research.
Thank you. I've got two parts to the question – or two slightly different questions. The first one is you started the business alignment roughly a year ago, August of 2017. And we're seeing the effect this quarter which is impressive. Should we expect that that's going to continue to layer in for the next three quarters and beyond? And then I got a follow-up.
I think you have to break it down, Mark. As we look at it, and this is why I think it was helpful that as Doug broke this down, you can understand how we're operating the business as it relates to the actions that we have been taking and then some of the things that I would consider to be overhang based on how the company performed before. So it's creating that clarity.
So we continue to see momentum specifically on the technology side and we believe that will continue to progress as we talked about, really, at Investor Day is I look at what's happening on the business unit side, it's sort of what I had outlined, we feel good about the actions that are taking place and the momentum we're gaining in TN.
On the Airline Solutions side, we've gone through a period that it was really focusing on how we look at our products and capabilities and how do we position ourselves for the future. And I feel good about where we sit there. And so when I take a step back, Mark, it's one that I feel good where this organization is, what they've accomplished and how do we continue to drive momentum going forward. That's not to say we don't have more work to do, but the momentum that we have been building is – I believe, continues into the future.
Appreciate the detail. And thanks for all the details on the tech investment and the way that tech is being done. It's a lot of information but very helpful. Quickly, digital marketing has been a drag on the Hospitality side. And it looks like we're going to have it next quarter. Is this something that's just going to be a long-term drag, or do you think at some point this turns?
Well, I don't know if it will be a long-term drag. There were some businesses that we expected to close this quarter, did not close. I wouldn't expect it to be a high growth area for Hospitality Solutions. And I think the good news is it's a very low-margin business. So to the extent that it doesn't grow or even does continue to decline, we do expect to decline slightly in Q4, it won't have a material impact on the bottom line.
Perfect, thank you. And congrats on the quarter.
Thanks, Mark.
We'll take our next question from Brian Essex with Morgan Stanley.
Hi, good morning and thank you for taking the question. Congrats on the good results. Hey, I just wanted to get a sense of – and Doug, thanks from me as well for that additional detail. And as we think about some of the puts and takes on the cash flow side, how do you anticipate the way that some of the investments may trail off or maintain and impact that that might have on cash flow conversion. If we were to focus on cash flow going forward, how do we develop expectations there?
Obviously with regard to tech expense, we want to make sure you understood where that's being spent. Well, focus is moving (31:19) into February, we'll give you more guidance on 2019 and where we expect cash flow to be. But I don't expect a material increase in the overall tech expense, the amount we actually spend year-over-year. So that's how I'd give you a sense of what's going to happen on cash flow.
Okay. But are there any projects right now that are initiatives, whether they're for transition or extraordinary items that are impacting cash flow that we might anticipate trailing off? Or is this ongoing leverage in the business expected to improve cash flow conversion going forward?
Well, the big thing that will end up happening, Brian, is one what we're seeing as it relates to the cloud migration we've talked about – and this gets within the DXC piece of it, that'll happen over the number of years that we outlined. If we look at some of the things that have also been focused on as it relates to the stability, that'll come off a little bit.
But the other thing that we're focused on is as it relates to the opportunities and where we want to continue and invest in products and services, that'll be the balance as we look at it going forward. And I think the level of granularity that Doug is driving to is making sure that, again, where we're investing that we're seeing the returns. And as you can imagine, we're in the midst of our budget process for 2019 right now and there's a high level of scrutiny taking place there.
Okay. That's helpful. Thank you very much.
We'll take our next question from John King with Merrill Lynch.
Yeah, good morning. Thanks for taking the questions. I've got two as well, please. So the first question was on the Hospitality trajectory. Obviously, I think coming out of Q2, you were a little bit more upbeat on how growth would fare in the back half of the year. Just trying to understand maybe what's changed with that? Is that some kind of specific ramp-up with a client that's been delayed? Obviously, from what we understand, they're pretty transactional businesses, so trying to work out how that's been impacted.
And then the second question was going back into the services business. I think both Hospitality and Airline Solutions, you called out services as being weak. So I just wondered if that has any implications for your gross margin on services or whether there's a risk of some kind of restructuring plan if that continues to be a bit of a drag? Thank you.
So let me first talk about the Hospitality piece, John. If you look at what I consider to be the underlying foundation of Hospitality as it relates to SynXis and what we offer on the CRS and the PMS side of the equation. And I feel good about that. And that's why we called out, essentially, the growth that we have seen, what we're expecting in the fourth quarter and then as we look into the future.
The part of the business that hasn't performed is the digital. And the one thing that you find with that is, as you would imagine, because of what we do there, a lot of that is close-in in nature. So just to be relatively frank, the deals that the teams thought they were going to close in the third quarter and what we're seeing in the fourth quarter aren't getting closed. But, as Doug identified, that's low-margin business. But I drive back to the primary piece of that business and we feel good on the CRS and where we said as it relates to property management moving forward, specifically on the limited service side of the equation.
To your second question on the services piece, some of the softening there, more on the Airline Solutions does tie to implementations. And that's one thing that we focus on the product health and what's taking place. I feel good where we're positioned as it relates to opportunities going forward, and you typically find that professional services go with that.
The other thing that I think is also beginning to play out, and I have been heavily engaged in this and it sits within sort of that group is what's playing out on NDC and the capabilities of expanding our capabilities of helping the marketplace understand. So when I look at I think this is just part of the transition we're going through, John. And as we continue to focus on the products and capabilities and we shared a lot of what we're rolling out within Airline Solutions, I think there's a lot to follow.
Thank you.
We'll take our next question from Ashish Sabadra with Deutsche Bank.
Thanks for taking my question. And again, congrats on the good results. Question about the CWT, you highlighted CWT strategic win several times. I was just wondering if you could highlight why did CWT choose you and Amadeus. What was the – like criterias used for decision-making? And then also if you can provide any color on how should we think about the materiality of the benefit. Is it a big one like Flight Centre or is it going to be modest improvement from here? Thanks.
Yeah. So I think – when I go back, I think the best way of sort of walking you through this, Ashish, is you go back to the investment that really TN made going back to the new Sabre Red Workspace, the win with Flight Centre, and our ability to sit with a number of agencies around the world and help them understand how we've invested in the product and what's taking place. And the way that I look at it is CWT did that same assessment and felt that they wanted to be a strategic partner on the technology side and moving forward.
With that, we're seeing an increased level of bookings and what's taking place. The level of impact will not be at the Flight Centre level because it's not 100% conversion. There's the balance relative to what they're taking place. But I do believe it's a testament to what Travel Network organization has done with its product and capabilities.
That's helpful. And then maybe just a quick clarifying question. Wyndham acquired La Quinta, have they made any decision on the La Quinta front on migrating the CRS there onto your platform as well?
Yeah. Based on – and I might be off on my dates a little bit here – but that will be converted over, and based on what I think I remember correctly, it is going to be in the second quarter. I think it begins in the second quarter of 2019.
Okay. Congrats on that. And maybe one final question. Just on the license fee revenues in the Airline Solutions, we saw that in the first quarter and third quarter as well. Does it create some sort of lumpiness in the revenue growth there? And does it create some difficult comps going forward, particularly for 2019? Any color there.
It will create a little bit of lumpiness and a little bit of tough comparisons in 2019. But I think more importantly, it's a real testament to the work that's been done in Airline Solutions to stabilize the business to get all those renewals. So I'll take that benefit over the little headwinds that it will cause us in 2019.
Thanks. Thanks for the color.
We'll take our next question from Neil Steer with Redburn.
Hi, thanks very much. I've just got two quick questions. Firstly, you mentioned during the presentation on Hospitality, that you're doing some work with IHG and selling a product that links into the third-party CRS and potentially PMS that they're using. Can you just add a little bit of color to that please?
Yeah. Part of it gets into – essentially, Neil, when they look at going out – number of hoteliers going out to essentially book a group in bookings, it allows them to do rate consolidation a little bit better that really drives to improvements of revenue. So, it's a capability that allows us to attach to, as I stated, the current capabilities that are out there from other PMS as well as CRS groups.
And – excuse me asking – is that license-based or is that a transaction-based platform that you're selling them there?
It is a license-based.
Okay. And the second question was during the comments on Travel Network, I think you suggested that you see a normalization of the incentive pressures coming through, I think you suggested, Q2 next year. Could you just add a little bit of context and color as to why you're so confident that that's going to be the case? Thank you.
Yeah.
Yeah – I'm sorry. Once we anniversary some of the major deals that have impacted the incentive fees going through 2018, that will begin to occur in the second quarter of 2019. So, we actually know when those begin to anniversary, so that's why we have confidence on that guidance.
Okay. So, it's not based upon any peer group actions, it's more to do with the anniversarying of your specific deals?
No.
No. And Neil, I mean, sort of, how we look at the environment going forward, just based right now, because we get a lot of questions that relates to what you see on the capacity side and then it gets into what Doug was talking about, as it relates to booking fee and incentive fee and what do we see into the future. And this is just based on where we sit right now is that in the fourth quarter – and I do this more from a seat perspective because that's how our transactions are driven versus ASMs or ASKs.
But as we look at Q4, we see growth, and this is on a global basis, of about 4.5% to 5%. But it's a little bit lower than where we were last year, which was in the low 5s. As we look at Q1, we're looking at growth based on schedules loaded between 5% and 5.5%. And last year, it was in the range of about 5.5% to 6%. So we're seeing a little bit of trimming of capacity but there hasn't been a significant trimming of capacity.
And then on the booking fee side of the equation, as we articulated in our comments, we're seeing 1 point of upside roughly from what's happening within the EMEA marketplace. If you look at the third quarter, this quarter we actually had some lower impact specifically with IAG because we had moved into the new model and then you get the uptick associated with Air France KLM. We see that actually staying in place because based on where we are with Air France KLM, that took place in the beginning of the second quarter last year.
And then the other piece of it is the mix that Doug was talking about, more in the APAC region specific to Flight Centre. And then on the incentive side, he just walked you through that. So again, this is just based on what we see right now as we look into the future.
Okay. Thanks and congrats for the quarter.
Thanks, Neil.
We'll take our next question from Jed Kelly with Oppenheimer.
Great. Thanks for taking my questions. First question, just can you give us any preliminary outlook into 2019, just sort of how you're thinking of the travel environment and what sort of assumptions you think we should be looking for? And then just on the comment on incentives growing in line with historical levels, over the last three years, the COGS growth rate's been pretty elevated, I know there's other factors. Can you kind of further just tell us what you mean by historical levels?
Yeah, Jed. I'll just recap – this is – responding to Neil and just what we're seeing as we go into 2019, and it was really on the first quarter capacity is that as we look at global capacity, we could see slight trimming on a year-over-year basis based on what is there right now. So what I mentioned is that capacity, based on what we see in schedules loaded, is up about 5% to 5.5%. And this is based on seats versus 5.5% to 6%. So we don't see a lot taking place there.
When we look at your second question relative to growing in line with historically where it was, it's the low to mid-single-digit growth. And again, if you look at it on a historical basis, we have had really rates on the Airline side grow in line with the incentives. So that's where we begin to see a level of normalization taking place in the second quarter.
And then your leverage ratio, I think you said it was 2.7 times. So it's in the lower end of your targeted range. I mean, how are you thinking of acquisitions? And I mean, I guess I would point to the Hospitality segment, right, that's still a pretty fragmented market. Just how are you thinking of the overall acquisition environment right now?
Yeah. So if you look at sort of where we are right now, it's one that I would say over the last 18 months, we were very focused on doing the things that we needed to do internally. As we look at opportunities as it relates to M&A in each of the three business units, we are exploring what those opportunities are and not afraid to move forward with what the opportunities may be able to do to essentially be a tuck-in and help us continue to grow.
Thanks you. Congrats on the quarter.
Thanks.
Your next question from James Schneider with Goldman Sachs.
Good morning. Thanks for taking my question. Sorry about that. Maybe wanted to ask at a high level about some of the investment opportunities that you see and the balance with respect to potential margin opportunities or rationalization of costs that you see over the next couple years. I know you kind of alluded to some of these things in the past, but maybe you could kind of wrap that up at a very high level in terms of what the trade-off between those two is. Do you think you're fully invested in all the new technologies you need to be in? And then at what point could we started to see a little bit more material margin expansion in the model?
First I would tell you with regards to just straight out margin impact, obviously, the credits that we've talked about that have a negative impact on us year-over-year from 2018 to 2017, we only have $15 million of those credits running through the P&L and in 2018, they obviously go to zero. So that's not as much headwind as the $43 million we faced coming into the year.
We've seen a significant growth in D&A this year, well above the top line growth. I don't expect D&A to grow at the same levels in 2019 and 2020 as to what we've seen occur this year. We've talked a little bit about the incentive pressure that we've had. We expect that to normalize as we get into Q2 of next year. And obviously, we continue to take a look at our total technology spend and obviously figure out where we could more rationalize that going forward. So those are some major impacts of what we had 2018 that will not impact us in 2019 and 2020 going forward.
And as we look into the future, the one thing that we're definitely focused on is the sequencing of things that need to take place. And as I talked to the organization about this, the first thing that we need to focus on is our data infrastructure strategy and what's taking place there. So I've walked through that. It then gets into the product side of equation.
So with the sequencing, I think there's more that we will continue to do that will allow us to look at ways of improving margin going forward. But there's a balance of what you can do, how quickly you can do it, and this is one that I see, really over the next several years, that is going to allow us to continue to see these improvements taking place.
That's very helpful color. And then maybe as a follow-up, wanted to ask a little bit about kind of as you look forward, where you expect the GDS market share to go. Clearly, Travel Centre (46:48) and some of the other wins and the booking strength in APAC are helping that. But anything you can talk about from a market share perspective beyond just the kind of regional mix that normally flings things around a little bit.
Yeah. As you know, that's difficult to predict, just because of the competitive nature. And this is where I go back to what we have continued to do on the technology side and the focus that we have on our products, the engagement that we have, not only on the agency side but the airline side. And this is where I think the team is doing an exceptional job of getting out there and talking about what we're able to do. And in doing that, it does drive back to what our customers are seeing with these capabilities, be it through what we've done as it relates to shopping and improvements in times associated with that, or what we're doing on the product side of the equation.
So the best way of essentially us continuing to win in the marketplace, I believe, is really pivoting hard to the technology things that we're doing. And if we're doing that right, our customers are definitely taking notice. And you've seen that with a couple of the deals that we've done here over the last 18 months. And I believe there's more in the pipeline that are very focused on taking advantage of those things that we've been developing.
Thank you.
We'll take our next question from Adam Hackel with Imperial Capital.
Hi, guys. Thanks for taking the time here. Doug, just curious, for you, you talked about some of your initial takeaways in the business your first few months here. Any surprises in terms of sort of the customer side or the airline sides technically and either how they're using data or just sort of how Sabreists (48:37) can fit into a business long term?
Yeah. As I – when I looked and decided to come here, one of the things that really excited me about this opportunity was the fact that if I take a look at the whole travel ecosystem, I don't think that that industry yet has adopted the digital transformation a lot of other businesses have, and we have an enormous amount of data that I believe we're eventually going to be able to find a way to monetize and to use to run our businesses and help our customers run their businesses going forward. So I think there's a lot opportunity with the whole digital transformation that could take place within the travel ecosystem.
That's great. And I guess as – looking ahead into 2019 and going forward, is it an appropriate time for us to start thinking about shareholder returns or at least we look at that and maybe look on dividend at some point down the line?
Yeah, could you do me a favor and let me get to the – this is my first budgeting cycle with the organization, can I give you more color on that in February once we get through that? Because obviously, I'd like the benefit of that before I make any more comments on that.
Yeah, no problem. Thanks for taking the time, guys, great quarter.
Thank you.
And with that, I would like to turn the call back to Mr. Menke for closing remarks. Mr. Menke?
Great. Thank you, Christina, and thank you again for joining us for our call this morning. We appreciate your interest and support and again look forward to talking to you more about the progress that we're making here at Sabre. Have a great day.