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Sabre Corp (NASDAQ:SABR)
Q2 2019 Earnings Call
Aug 1, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Sabre Second Quarter 2019 Earnings Conference Call.[Operator Instructions].

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

Barry Sievert -- Senior Vice President of Investor Relations and Corporate Communications

Thank you, Lidia, and good morning, everyone. Thanks for joining us for our second-quarter earnings call. This morning we issued an earnings press release, which is available on our website at investors.sabre.com. A slide presentation which accompanies today's prepared remarks is also available during this call on the IR web page. A replay of today's call will be available on our website later this morning.

Throughout today's call, we will be presenting certain non-GAAP financial measures, which have been adjusted to exclude certain items. All references during today's call to EBITDA, EBITDA Less Capitalized Software Development, 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 would like to advise you that our comments contain forward-looking statements. These statements include among others disclosures of our guidance, including revenue, EBITDA, EBITDA Less Capitalized Software Development, operating income, net income, EPS, cash flow and capex . Our medium-term outlook, our expected segment results, the amount and effects of changes in capitalization mix and depreciation and amortization. The effects of customer financial conditions and new or renewed agreements, products and implementations. 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 first quarter 2019 Form 10-Q and our 2018 Form 10-K.

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; Dave Shirk, our Executive Vice President and President of Travel Solutions; and Clinton Anderson, Executive Vice President and President of Hospitality Solutions are also with us today and will be available for Q&A, after prepared remarks.

Sean will start us off and provide a review of our strategic and commercial performance and business outlook. Doug will offer additional perspective on our financial results and forward outlook. And then we will -- we will then open the call to your questions.

With that, I'll turn the call over to Sean. Sean?

Sean Menke -- President and Chief Executive Officer

Great. Thanks, Barry. Good morning everyone and thank you for joining us today. Before we get into the details of the call, I want to take a moment and thank my Sabre team members from around the world. Over the past two plus years we have made substantial progress in refocusing, reinvigorating and transforming Sabre. Their tireless effort across the globe have allowed us to thrive as a global technology leader in retailing, distribution and fulfillment of the $1.7 trillion travel marketplace in which we reside.

Our business model, which is underpinned by long-term contracts, renewal rates of over -- well over 90% and revenue streams that are tied to travel volumes has proven resilient across economic cycles. The Sabre team should be very proud of what they have accomplished and I'm very grateful for their hard work and dedication.

With that, I'm pleased to report a solid second-quarter performance that was supported by our business model and commercial wins. The second quarter of 2019 marked the 6th consecutive quarter of strong gains in our GDS share. We grew bookings 8% in our home region of North America. At Airline Solutions, we saw a 15% increase in AirVision and AirCentre commercial and operations revenue in the quarter. Our broad set of SaaS airline solutions continues to gain momentum following our efforts over the past two years and has contributed to our ability to contract approximately 75% of our current Airline Solutions revenue base through 2023.

At Hospitality Solutions, we have exceeded sales targets for the fourth quarter in a row and grew revenue by 8% year-over-year in the quarter. We are accelerating new innovations to differentiate versus our competitors. This includes the continued roll-out of Sabre Red 360 and new lodging content innovations, including a significant expansion of properties available through our GDS.

We have recently launched the new Sabre Virtual Payments platform, continued progress in our NDC efforts, brought to market the industry's first Airline Commercial Platform and introduced an innovative Hospitality Intelligent Retailing Platform that opens new sources of revenue growth for our hotelier customers. In the quarter, we showcased our products at our Sabre Technology Exchange Conference in Las Vegas. As a result of the improvements we have made over the past two years, our innovations are gaining traction with customers and we had record attendance this year from around the globe.

Our momentum continue to move in a positive direction in the industry. Taking a closer look at travel network, we have over 38% share and have been winning share over the past six quarters. We expect continued share gain and solid revenue growth over the coming years, in line with or above growth rates in global travel on a base of $2.8 billion in 2018.

In our home region of North America, we have already lived through an era of pricing pressure and deregulation. In other places around the world, where these trends are now taking place and carriers are trying to drive more direct traffic, we are relatively less exposed due to the fact that the majority of our bookings are for longer-haul traffic made outside of our home countries. In EMEA, we have grown our air bookings at a 3.5% CAGR over the past three years, versus a 40 basis point decline in GDS industry bookings in the region.

Our ability to win recent major deals like Flight Centre and Carlson Wagonlit Travel is anchored by technology. Our technology investments create network effects that scale across hundreds of airlines and hundreds of thousands of travel agents, with the cost of direct versus indirect distribution converging are differentiated on technology is really important. Our technology leadership includes the launch of Sabre Red 360, our next-generation agency desktop, our leadership in NDC and next-generation retailing, including the introduction of NDC APIs with United and the rollout of our next-generation Storefront with Delta, lodging content expansion, new focus on our Sabre Virtual Payments solution in partnership with Visa and the first GDS to migrate all of our shopping complex to the cloud.

In the second quarter, we increased our booking commitments with IATI, Turkey's leading OTA and travel services integrator and signed a significant renewal with Travel and Transport, a large corporate travel management company. As of quarter-end, we are tracking well with respect to key conversions at Etraveli Group, a large European OTA and with respect to our deepened business relationship with Carlson Wagonlit Travel.

Finally, on the supplier side, we signed 14 deals in the quarter, including renewals at LOT and Air Europa and three new supplier agreements. Finally as expected our incentive fee per booking growth moderated to low single digits in the quarter. At Airline Solutions, we feel good about the progress we have made over the past two years and believe we have a healthy sales pipeline. We have locked in approximately 75% of our revenue through 2023. Of total contract value up for renewal over the past two years, we have a strong renewal rate of 94%. We expect solid revenue growth in line with or above growth in global travel over the coming years after we anniversary some near-term impacts. And we expect this new revenue will come in at high incremental margins.

At Sabre Technology Exchange, we officially demoed Sabre Commercial Platform, the most significant upgrade in over five years and enables 50X faster shopping experience, delivers dynamic and intelligent offers to help maximize revenue per carriers, fulfills across all channels and delivers a personalized customer experience. In the quarter, I am pleased to announce the Crew Manager continues to gain traction and we also signed and successfully implemented Crew Manager at Azul. At Aeroflot, we signed a new deal for Shopping Cache in our retailing suite and a renewal and upsell of Movement Manager. Ethiopian Airlines signed a deal for Dynamic Availability, a big data solution that is part of the initial roll-out of Saber Commercial Platform. We signed other share of wallet increases at GoAir and Finnair and key renewals at Copa, Croatia Airlines, Alaska Airlines, and Air France.

At Hospitality Solutions, we are the clear global leader in central reservation systems. We have over 42,000 properties live on our solutions all around the globe. We expect continued strong growth in Hospitality Solutions revenue at a 7% to 9% rate over the next several years, as we expect to continue to gain scale in our fragmented and under-penetrated market. We completed the industry's first and largest enterprise hotel implementation with Wyndham, including our acquisition of La Quinta which we implemented at the start of the second quarter.

At Sabre Technology Exchange, we demoed the first -- for the first time Intelligent Retailing Platform. Our vision for next-generation hospitality retailing that enables attachments of ancillary products and experiences like concert tickets and dinner reservations to the core booking. In the second quarter, we implemented products at 1500 incremental properties at new and existing customers. We closed a share of wallet increase at with Coho Res for Sabre Property Hub, our next-generation hotel property management solutions. Multiple other key wins and renewals were signed in the quarter, including Karisma and Hard Rock International.

In terms of technology, we expect to invest over $1 billion this year in total. We are continuing to build out our global cloud landing zone and now have over 55% of our total compute footprint in the cloud, including our entire Travel Network shopping complex. In the second quarter, we completed the final cut over of Travel Network's Air Shopping out of the Tulsa data center. All shopping requests are now being split across cloud landing zones in the U.S. and we are now handling peak traffic of over 11,000 Travel Network-shopping request per second.

The majority of our public cloud compute footprint is currently within the Amazon Web Services. We now have cloud landing zone set up with Microsoft Azure supporting our multi-cloud provider strategy and are preparing to deploy multiple Airline Solutions and Hospitality Solutions products there including SabreSonic Web and our SynXis Central Reservation System. Later this month, we are planning to move the Airline Solutions shopping workload out of our Tulsa data center. Future steps will lead to the global distribution of web services gateways and seat availability, culminating in the expected launch of shopping in EMEA and/or Asia-Pacific next year. Before I turn it over to Doug, I want to take a moment and address our agreement to acquire Farelogix. We are continuing to engage with the U.S. Department of Justice under a second request as well as the UK Competition and Markets authority to communicate the significant customer benefits that we believe will arise from the deal.

Last November, we first announced our intent to acquire Farelogix, a recognized innovator in the travel industry with advanced offer management and NDC order delivery technology used by many of the world's leading airlines. We remain passionate about our original decision to bring our two organizations together and the positive impact we can have on the travel ecosystem. We expect Farelogix's complementary products offering will accelerate our delivery of the industry's first end-to-end airline retailing solution. We believe together Sabre and Farelogix can make NDC which is currently still in early days with minimal bookings grow into a reality that helps our airline customers become better online retailers through the creation of dynamic offers that meet the personalized demands of today's travelers.

As I mentioned in the letter, I recently wrote to the top airline CEOs around the world, we intend to continue to supporting our customers' retailing and distribution strategies regardless of channel and fully support and develop Farelogix's suite of products and services, including direct connect capabilities. We continue to engage with the regulatory authorities about the benefits of this acquisition and why we believe it is good for our customers, good for travelers and good for competition.

Turning back to the quarter, the business is performing well on the strong foundation we have laid. Our solid second quarter performance, commercial wins, leading innovation and infrastructure progress gives me confidence in raising our full year 2019 earnings guidance.

And with that, I'll turn the call over to Doug to get into more of the details of our second quarter results and expectations going forward. Doug?

Doug Barnett -- Chief Financial Officer

Thank you, Sean. Under Sabre's business model, our revenue streams are tied to travel volumes which are resilient across economic cycles and long-term contracts, sticky solutions and renewal rates are well over 90%.

Let me remind you of the durability of our business model, during the great recession we grew EBITDA every year and revenue grew every year except 2009 when it was down less than 1%.

Looking more closely at our Q2 results. Revenue was up 2% year-over-year totaling $1 billion. In the second quarter, recurring revenue totaled 93%. Revenue growth was driven by solid performance across each of our businesses. Travel Network revenue was up 1%. Airline Solutions revenue was up 3% and Hospitality Solutions revenue was up 8%. The EBITDA less capitalized software development, which reflects our total R&D was down 1% in the quarter. The EBITDA less capitalized software development pressure was largely driven by a modest increase in Travel Network incentive fee per booking. In the quarter, as expected, incentive fee per booking growth moderated to low single digits versus double-digit growth over the past eight quarters.

We continue to make good progress on our cloud migration. As I will describe in more detail later, our technology transformation is already driving leverage in the model and total technology spend was down slightly in the quarter. As previously discussed, the cost associated with our cloud migration and related technology transformation efforts are expensed as incurred, instead of capitalized. So while our total technology spend went down slightly, a shift in our capitalization mix caused technology operating expenses to increase in the quarter with an equal and offsetting decrease in capex . We also saw an increase in depreciation and amortization related to previously capitalized technology spend as products are placed into service.

Accordingly, operating income totaled $127 million in the quarter, representing an operating margin of 13%. The year-over-year decline in operating income reflects the near-term impact to our income statement from the change in the technology expense recognition. Excluding the increase in technology operating expenses, operating income declined 4% and operating margin was down 90 basis points in the quarter.

As a reminder, the capitalization shift has no impact on free cash flow.

EPS totaled $0.24 in the second quarter, down 5% year-over-year, excluding the increase in technology operating expenses. We believe our financials are reaching an inflection point. We are taking a double hit to our income statement this year related to the capitalization mix shift from the increased technology operating expenses due to a lower capitalization rate as well as increased D&A from previous capitalization. But as we look to 2020 and beyond the base will be reset. We believe we are set up for expanding EBITDA margins as we expect to realize savings from our technology initiatives. Additionally, we expect accelerating operating income and EPS growth as D&A rolls off due to expected lower capitalization. Expected D&A savings totaling approximately $140 million in 2019 to 2022.

Finally, our businesses has generated strong free cash flow. We generated $76 million of free cash flow in the second quarter and we continue to expect full year free cash flow generation of approximately $455 million. We returned $84 million to shareholders in the second quarter via share repurchases, and our quarterly dividend.

Now our Travel Network, revenue grew 1% in the quarter totaling $725 million. This was slower than previous quarters, but in line with expectations as we begin to anniversary favorable European carrier pricing and the completion of the Flight Center migrations. The second quarter, represented our 6th quarter in a row of strong GDS share gains. Our global bookings share increased by 120 basis points in the quarter, representing 38.6% share. We continue to gain share at large global travel management companies including our expanded strategic agreement with CWT.

GDS industry bookings declined in the quarter due to a relatively more challenging macro environment and Easter timing as well as the insolvency of Jet Airways and channel shift driven by the three legacy European carrier families. GDS industry bookings declined 2% in the quarter but excluding Jet and the three legacy European carriers grew 1%. The maturity and balance of our global customer footprint and new business wins have allowed us to grow faster than the overall GDS industry.

Our largest book of business is in North America. We have already lived through the era of pricing pressure and deregulation in our home market where the cost of direct and indirect distribution have converged. Our air bookings increased 1.4% in the quarter which is in line with second quarter expectations we communicated on our previous conference call. Excluding Jet Airways and the three legacy European carriers, our air bookings increased 2.6% in the quarter.

Total bookings in the quarter grew 1% driven by air bookings growth and a modest decline in a lodging, ground and sea bookings. Hotel bookings grew high-single digits in the quarter, reflecting our focus on lodging content expansion. However, consistent with last quarter, our lower margin rail bookings declined in the quarter. We will anniversary the rail impact and expect healthy growth in lodging, ground and sea bookings beginning in Q4 of '19.

Looking at the regional level, the health of our home market is strong. North America is the only region that posted GDS industry growth in the second quarter and it was solid at 4%. We have over 80% share with large travel management companies in this region, representing airlines' most valued customers. Our North American bookings grew 8% in the quarter twice as fast as the GDS industry.

GDS Industry bookings declined across all other regions. In Latin America, our bookings declined due to macroeconomic weakness and volatility. On a volume basis, Latin America is a smallest of the four regions we report and makes up less than 10% of our total worldwide bookings. As mentioned GDS industry bookings in Asia-Pacific in the second quarter were impacted by the insolvency of Jet Airways and our bookings declined accordingly. GDS bookings in India saw a double-digit decline in the second quarter versus double-digit growth in the prior year quarter. As a reminder, we are relatively less exposed to the Indian market.

In EMEA, about half of our bookings decline was driven by the impact of low margin rail bookings and about half was driven by industry softness due to the

due to the channel shift by the three legacy European carrier groups. Our exposure to the impact of the three legacy European carrier groups is less than the other GDSs due to the fact that over 50% of our bookings from those carriers are made outside of Europe and are typically for longer haul, higher yielding traffic.

Jet Airways and the three legacy European carriers had a combined three point negative impact to total GDS industry growth in the quarter versus a one point negative impact on Saber bookings growth. Average booking fee declined 60 basis points in the quarter, in line with our expectations communicated last quarter. This was driven by 150 basis points of negative impact from regional air mix primarily due to faster growth in North American bookings versus a decline in international bookings partially offset by 100 basis point positive mix impact from the decline in low profitability rail bookings and strong growth in hotel bookings.

Remember that we have anniversaried the favorable European carrier pricing and the beneficial mix impact from the completion of the Flight Center migrations. Incentive fee per booking normalized to the low-single digit growth in the quarter as expected. We expect normal inflationary incentive fee for booking growth to remain in the low to mid single digits over the medium term. We expect margins to stabilize and in 2021 we expect margins to begin to expand.

As a reminder, the high level of incentive inflation over the past two years was driven by large strategic deals including renewals at five out of six of our top agencies through 2023 and beyond and recent major wins at Flight Center and CWT. Turning back to the quarter, operating income totaled $160 million representing an operating margin of 22.1%. The majority of the margin decline was driven by the impact of the shift in capitalization mix.

Excluding the increase in technology operating expenses driven by the capitalization shift, operating income declined 6% and operating margin declined 180 basis points. The margin pressure was driven by incentive fee growth that outpaced booking fee growth. At Airline Solutions after successfully navigating a heavy renewal cycle over the past two years, we now have locked in approximately 75% of our revenue through 2023 with the high renewal rate of 94% based on total contract value. With our rollout of the industry's first Airline Commercial Platform, we feel good about our competitive position especially as we believe a large competitor is entering a heavy renewal cycle with a significant number of passengers boarded up for renewal over the next three years. Airline Solutions revenue totaled $212 million in the second quarter, representing growth of 3%. As previously discussed, there are factors outside of our control that impacted our performance.

These include the insolvency of Jet Airways and significant volume reductions at a certain Asian carrier due to unfortunate 737 MAX incident. Additionally, the quarter was impacted by the de-migrations of Philippine Airlines and Pakistan International Airlines. Excluding these certain carriers, Airline Solutions revenue grew 12% in the quarter. SabreSonic revenue declined 3% and passengers boarded declined 8% in the quarter due to the certain carrier impacts I just mentioned.

Excluding a certain carriers, passengers boarded increased 4% in the quarter. AirVision and AirCentre revenue increased 15% in the quarter. This was largely driven by strength in our operations portfolio and upfront revenue recognition from local installs. It reflects the success of recent innovation and progress we have made and improving our stability and product help. Our Airline Solutions business has high incremental margins. Airline Solutions operating income was down slightly versus the prior year driven by the shift in capitalization mix. Excluding the increase in technology operating expenses, operating income growth was 61% and operating margin increased 660 basis points.

The progress we have made improving our stability and product health and other technology initiatives provides operating leverage in the model. We expect Airline Solutions EBITDA margin to expand nicely over the medium term. Hospitality Solutions is a global leader in hotel central reservation systems. We have over 42,000 properties live on our solutions. This includes the industry's first and largest enterprise hotel implementation with Wyndham Hotels and Resorts, including their 2018 acquisition of La Quinta Inns & Suites, which we fully implemented at the start of the second quarter of this year.

Hospitality Solutions revenue grew 8% in the quarter supported by 8% growth in SynXis software and services, revenue and a similar increase in digital marketing services revenue. Hospitality Solutions central reservation system transactions increased 28% in the quarter, which includes the benefit of migrating La Quinta at the beginning of the quarter as well as certain other Wyndham Hotel brands in the second quarter of last year.

The shift in capitalization mix resulted in a modest operating loss for Hospitality Solutions in the quarter. Excluding the increase in technology, operating expenses, we have positive operating income up 185% versus the prior year and 470 basis points of operating margin expansion. In the second quarter, total technology spend was $256 million. As a reminder, this includes the cost that we incur whether capitalized or expensed for hosting third-party software and R&D.

Total technology spend decreased 1% in the quarter, reflecting progress we are achieving on our cloud migration and other technology initiatives. As Sean mentioned, we now have over 55% of our total compute footprint in the cloud. The scale and leverage we are already gaining enables us to continue to strategically invest in new products, innovations and infrastructure. We continue to expect full year 2019 technology spend growth of 3% to 4%. As discussed on our past two earnings call and today, the cost supporting our cloud migration and other technology transformation efforts are not capitalized. This resulted in a 15 point decline in capitalization mix from 24% in the second quarter last year to 9% in the second quarter of this year. Although neutral to free cash flow, this shift significantly impacts operating income and EBITDA.

Additionally, the increase in amortization of previous capitalization resulted in a $4 million headwind to second quarter operating income. This is of course neutral to both EBITDA and free cash flow. As a result of the capitalization shift and increased amortization, the amount of total technology expense running through our income statement in the quarter increased by $38 million or 14%. Remember this refers to our total technology spend, less capitalized software development, plus amortization of previous capitalization.

As I mentioned, our business generates strong free cash flow. Second quarter free cash flow totaled $76 million down modestly due to working capital timing. We continue to expect full year free cash flow of approximately $455 million. We ended the quarter with approximately $3 billion in net debt and a leverage ratio of 2.9 times. We expect our leverage ratio to continue to naturally increase in the short-term due to the change in capitalization mix. As a reminder, our target leverage ratio is 2.5 to 3.5 times with a preference toward the lower end of that range. Our uses of excess free cash flow are: investments in the business both internal and external, dividends and share repurchases to offset dilution at a minimum. We repurchased 2.2 million shares for approximately $46 million and including our dividend returned $84 million to shareholders in the second quarter. Year-to-date, we have returned $155 million to shareholders via the repurchase of 3.7 million shares and our regular quarterly dividends. We believe the business is performing well and better than expectations. Therefore we are raising our full year 2019 earnings guidance. We continue to expect total stable revenue growth of 3% to 5% to $3.965 billion to $4.045 billion. At Travel Network, we now expect full-year revenue growth of 3.5% to 5.5%. We now expect full year bookings growth of 2% to 4% reflecting the sluggish GDS market. However, we expect continued share gain over the back half of the year to drive bookings growth that outpaces the industry. We have new agency conversions and share of wallet increases in the pipeline that have already been won and are currently being implemented.

Accordingly, we expect bookings growth to accelerate in Q3 and Q4. We are raising our expectations for full year average booking fee growth to approximately 1.5%. We previously expected average booking fee to be roughly flat across the back half of the year, but we now expect about a 1% increase. By quarter we expect booking fee growth of approximately 150 basis points in Q3, and roughly flat in Q4. At Airline Solutions, we are raising our guidance and now expect full-year revenue to be roughly flat year-over-year.

On a quarterly basis, we expect revenue to be down in Q3, and roughly flat in Q4 due to deal timing. At Hospitality Solutions we continue to expect a strong revenue growth of 7% to 9%. We continue to expect EBITDA of $945 million to $985 million, and EBITDA less capitalized software development of $850 million to $890 million. We are raising guidance for operating income and now expect full-year operating income of $495 million to $535 million. We now expect full year depreciation and amortization of $450 million lower than our previous expectations.

Moving down the P&L, we have raised our expectations for net income and EPS and are now guiding to net income of $250 million to $290 million and EPS of $0.91 to $1.05. We continue to expect free cash flow generation of approximately $455 million or year-over-year growth of 3%. Remember, this represents growth of 11% excluding a $29 million insurance settlement payment received last year. Our capex expectations remain unchanged at $130 million to $150 million.

Remember our business has typical working capital seasonality that benefits the fourth quarter compared to the first three quarters of the year. In Q3, we expect free cash flow to be consistent with Q1 and Q2 average run rates with a significant quarter-over-quarter step up in Q4.

In closing, we believe our business is solid, as we look at the rest of 2019 and beyond. I have confidence in our outlook and remain confident in the underlying performance of the business.

Now, back to you Sean.

Sean Menke -- President and Chief Executive Officer

Thanks, Doug. And we'll let you take a breath and get a drink of water there. As you can see, we're pleased with how the year is progressing and would like to once again thank the many colleagues around the world for their hard work and dedication. It is our strong belief that you should have growing confidence from what you're seeing in our actions and more importantly, our results. Our Travel Network share gain demonstrates the importance of our investments in products and full cloud deployment of our shopping complex and incentive fee growth significantly decelerated in the quarter. With 15% growth in AirVision and AirCentre commercial and operational revenue we are starting to see improved portfolio health show up in the results.

We have migrated over 55% of our total compute footprint to the cloud and the associated savings allowed us to reinvest in further transformation efforts, while posting reductions in total technology spend in the quarter. In summary, we are progressing well and have confidence in achieving our full year 2019 goals. I want to once again thank you for joining our call today and for your continued interest in Sabre.

And with that, I will ask the operator to open up the call for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question coming from the line of John King from Bank of America. Your line is open.

John King -- Bank of America -- Analyst

Yeah, thanks for taking the questions. Hi guys. Just on the delays maybe to the prices with Farelogix. I'm just wondering how you're dealing with that from an R&D perspective, whether that's kind of cause you to reallocate any investments, perhaps Sean you can give us a view on that? And then nice to see the improvements in the Airline Solutions business, how big relative to say this like how big is AirVision and AirCentre now and maybe what's the outlook that you see in the pipeline for those modules? Thank you.

Sean Menke -- President and Chief Executive Officer

Yeah. Thanks, John and thanks for joining. On the Farelogix space, it's a combination of things. And I think the important thing, as you look at the industry and what's happening, and our focus on Farelogix in their capabilities, and I mentioned in my prepared remarks, we're still early on in this as it relates to anything that we're doing internally and shifting of resources is not happening. So we continue to go down that path and work.

To me there such positives associated with this acquisition relative to the transformation that's happening in the industry and as we continue to move forward talking with airlines as well as talking with the agencies around the world. There is this desire to continue to move forward. But we've also learned and I've often talked about this, there's just a lot of work that needs to take place and I couldn't think of a better company to be leading the charge than Sabre and what we're doing there.

As it relates to the AirVision, AirCentre piece of the equation. It's the smaller piece, I mean SabreSonic is the bigger piece and what's taking place. If you go back to some of the health issues that we are having with the products and to be pretty candid with you is really on the AirCentre side of the equation and what the team has done specifically on crew, crew management, crew qualification within that product portfolio, or that portfolio, it's just amazing and what you're finding is continued growth. And Dave. I don't know if you want to add any comments on either of those.

Dave Shirk -- Executive Vice President and President, Travel Solutions

No, I was just going to I guess what I would point back to is, thank you for the comments on the recognition of the improvement in the Airline Solutions business. I think one of the things we focused on was as Sean said focused on the health, the health is there, then you'll start to see customers upgrade once they start to upgrade. As we've talked about, they get more current on versions and they can take a cross-sell and up-sell of additional capability and the growth in AirVision and AirCentre is a good reflection of the health of the portfolio and continued progression over the multi-year plan that we put in place including the October launch of the Commercial Platform and its competitiveness in the market. So we feel pretty good about how those pieces are progressing, right now.

Sean Menke -- President and Chief Executive Officer

John. One thing I would add and this goes back to not only what Dave and team have done when he was running Airline Solutions, but I have quietly sitting across the table from me on the hospitality side and the focus in bringing technology talent in making sure that the products are healthy. What we're doing on the cloud side of the equation. I'll be honestly, I'm blown away with what the team has been able to do at 55% of our total compute in the cloud where two years ago we weren't there and what we talked about is how do we essentially take those savings and reinvest in the business. And what's nice to see and I really saw this at the Sabre Technology Exchange in Las Vegas, where we had I think was close to 1,600 customers from around the world.

They were really asking us about our technology sort of evolution and what's taking place, and it's really great when you had your customers not only think about the products that we have but how do they think about their own infrastructure and transformation that they're going through. So just many positive things.

John King -- Bank of America -- Analyst

Great, thank you guys.

Operator

Our next question coming from the line of Mark Moerdler with Bernstein Research. Your line is open.

Mark Moerdler -- Bernstein Research -- Anlayst

Thanks. And I also very congrats on the improvements we're seeing. What I'd like to look at is the question of the operating margin. Operating margin has been hit by the move of technology costs from capitalized to expense as well as the flip side, the amortization of the previously capitalized tech investment. Can you give us some color on how to think about, once you through this process, what happens to margins as the increase in OpEx from expense tech get fully offset by the shrinkage in the amortized tech investments going away?

Doug Barnett -- Chief Financial Officer

Yeah. So Mark you are absolutely correct. So what's happening right now, we're going to hit twice in a sense, by this capitalization shift. Last year as I mentioned, we capitalized that our capitalization rate closer to 24%, 25%. Now we're down to 9%. So those expenses now running through not only EBITDA, but the operating income and net income. And then you're correct, the high amortization and capitalization we previously had is now starting to hit us. As we move forward, we expect to have the capitalization rate probably moderate in this 9% to 10% range. So will no longer be negatively impacted by the rate change, and will have a significant benefit from a lower amortization as you move out, particularly in the 21% and 22%. That's why I mentioned in my comments that there is probably going to be a $140 million benefit between 2019 and 2022 and 2022 from lower amortization which absolutely drive rapid margin expansion for operating income, net income and EPS growth.

Mark Moerdler -- Bernstein Research -- Anlayst

When you're -- just to clarify as you get through this, once you get to whatever the normalized moment in time if there ever is one, does it basically go back to what you had before, and it's just simply a shift in the way in which those costs are being recognized?

Doug Barnett -- Chief Financial Officer

I think it will go back a little bit higher, and the only reason why I said, it has been, first you're absolutely right that the actual capitalization mix and the amortization will normalize. But the fact that we expect our R&D costs to grow at a lower rate than the top line we'll actually have more margin expansion that we would have had in the past.

Mark Moerdler -- Bernstein Research -- Anlayst

Excellent. I really appreciate it. Thank you.

Sean Menke -- President and Chief Executive Officer

Thanks, Mark.

Operator

Our next question coming from the line of Matthew Broome with Mizuho Securities. Your line is open.

Matthew Broome -- Mizuho Securities -- Analyst

Yeah, thanks very much. Given that you appear to have a good opportunity to consolidate the Hospitality Solutions market over the next few years. What is the opportunity to accelerate revenue beyond that 7% to 9% growth rate, you mentioned?

Clinton Anderson -- Executive Vice President and President, Hospitality Solutions

Yeah, Matt, thanks for the question. This is Clinton. We see a lot of opportunity in two primary areas, the area we're most excited about is the concept of intelligent retailing and this is really where we are introducing a new product in the marketplace that allows for hoteliers to sell products and services beyond the room. One of the challenges we've had historically in the industry is that we've thought about inventory is being a hotel room at a certain rate for a length of stay and we know that travelers are looking for a much broader set of experiences some of the products and services, you can add to that hotel room are the things that hotels can market and sell to their customers. And so this drive not only top line revenue in the form of higher conversion, higher yield, higher share of wallet, but many of these products and services are very high margin that flow to the bottom line. It also creates a very attractive -- it also creates a very attractive guest experience, right. So it's benefiting all parties involved. So we see upside there in terms of growth acceleration.

The second thing we see is as we finish the trust migration we now move on to a single platform. A single platform is a relatively modern tech stack and the tech stack has a set of common services for both the central reservation system as well as for our PMS system. So the single brain there gives us the ability to have single platform type economics as we grow in the future and delivers many of the benefits you've seen in other platforms in other tech space that we think will allow us to compete much more effectively for hotels are looking to have a single source of technology.

Matthew Broome -- Mizuho Securities -- Analyst

Okay, that's interesting. Thanks. And I mean can you specifically quantify the revenue and EBITDA impacts from the I guess the sort of the 2D migrations in Airline Solutions. You mentioned this quarter and will this impact increase next quarter?

Sean Menke -- President and Chief Executive Officer

Look, obviously next year we will begin to normalize those but I have to [Indecipherable] understand the number, yeah as we met -- we would have had, you can do some math, we would have had 12% revenue growth, excluding those de-migrations, which obviously would been come in at very high margins.

Matthew Broome -- Mizuho Securities -- Analyst

OK. Thanks very much.

Operator

Our next question coming from the line of Jim Schneider with Goldman Sachs. Your line is open.

Sean Menke -- President and Chief Executive Officer

You there? Let's go to the next question.

Operator

Our next question coming from the line of Ashish Sabadra with Deutsche Bank. Your line is open.

Ashish Sabadra -- Deutsche Bank -- Analyst

Thanks. Thanks for taking my question. Sean, any color on discussion with airlines about potential new SabreSonic wins competitive momentum?

Sean Menke -- President and Chief Executive Officer

Yeah. Ashish, good to hear from you, I'll go back to where we were with when Dave was talking about the things that are taking place with technology and we're not going to get into specific campaigns that were involved in right now, but the suite of products that you know Dave and team have essentially revitalize their out in the marketplace. We are having -- what I would consider to be encouraging conversations in many regions of the world. And as you know, this is a long process that takes place. The other thing that continues to really begin to weigh into the conversations, as I mentioned this I think last year and and begin to the plan to see it is people are really looking at going back to Farelogix what's happening on the distribution side. There is definitely alignment with what's taking place there. But I'll let Dave add a couple of comments since he and his team are in the midst develop many of these campaigns.

Dave Shirk -- Executive Vice President and President, Travel Solutions

Yeah, I would just echo what we've said in some of the comments that were there earlier which is, we've been focused on our installed base. You obviously the best thing you can do is have your installed base healthy and satisfied and growing which you're seeing the beginning progress of that starting to show up now as we've talked about. And then the fact that we've shipped from defense to offense. Competitively there is a significant renewal cycle ahead of us over the next three years from our competition and the health of the portfolio. I'm very excited about some of the comments and some of the customer feedback that we're seeing, as they begin their upgrade journey from our installed base and that just reflect itself as Sean talked about in conversations that are starting to pop up in different regions around the world.

So pipeline positive, activity positive and it's one of those things where these are, as Sean said, these are I'm learning a lot over the last few years of exactly how challenging some of these transformations inside various airlines around the world are, but the team is well engaged. And I think we're at a point now where we're very well equipped with differentiation. The technology transformation cannot be underestimated. We are the first and number one in cloud-based computing in the travel industry. We're the first ones to move to the cloud. We have 55% of our compute power there. As Sean mentioned, it should be underscored significantly. Our entire shopping complex and the network globally is in the cloud that makes us number one in shopping in the cloud as well. So a lot of the criticisms maybe in the past around our technology footprint. We have made enormous strides over the last two years there and I'm very, very proud of the work, the team has done and continues to do and that puts us in a very positive position for these conversations and what we see over the next couple of years is that transition in those, those open opportunities for renewals situations are out in the market.

Sean Menke -- President and Chief Executive Officer

Yeah, Ashish. Another way of looking at. And I think it does go back to why you should focus on what's happening within the AirVision, AirCentre portfolio is that's an indication of what the team has done as it relates to the health of the product and one the advancement of the product. If you look at it relative to why we keep talking about the cloud, not only because of what it does for us on a stability basis, as a cost basis, but it gives us global distribution and what our global disbursement in that. And one of the most important things for customers is that there's not latency there because the latency can have impacts and what's taking place. And so you're beginning to see what I would say are the green shoots of early good things that are happening and the lead indicators on that is what's happening with AirCentre and AirVision as you could assume there's a lot of other work that has been going on behind the scenes, a big part of it and I think it goes back to the renewal that we announced with JetBlue and some of the things that will be rolling out to them. But when you look at some of the components that we talked about when I talk about Ethiopian Airlines. I talked about Aeroflot and some of the products that they're taking. These are some of the things that we have invested in, on the digital commercial platform that comes together is the entire suite of products that we can take to a carrier and essentially present. And I think you can hear, just in our voice and how we're feeling about the business that we feel like we're in a much better place than where we were two years ago.

Ashish Sabadra -- Deutsche Bank -- Analyst

This is very helpful. Thanks a lot. And maybe just a quick question. Any initial thoughts on the recently announced leadership change in travel -- at Travelport and then going private again, very early days, but how could that the combination of that could influence the competitive environment going forward?

Sean Menke -- President and Chief Executive Officer

Yeah. Not much, I mean we know Greg is a nice guy, he has been around -- he's around Sabre for a number of years, I think we like a number of groups are waiting to see what the direction of new ownership and new leadership is going to be, but as I continue to talk to the team and we look at what we're doing, we're running our own rates. We feel very good about what we're doing. The customers are responding to what we're doing in the marketplace. We've seen it as it relates to the share growth and the pivot in what's happening relative to where, where incentive rates where we're getting new deals and this is really tech focus and we're going to continue to focus on the tech and we believe that's our, that's where the opportunity is and as I mentioned, customers are responding positively.

Jim Schneider -- Goldman Sachs -- Analyst

Thanks, Sean. Thank you.

Sean Menke -- President and Chief Executive Officer

Thanks, Ashish.

Operator

Our next question coming from the line of Neil spear with Redburn. Your line is open.

Neil Steer -- Redburn -- Analyst

Thank you and congratulations on the, for the quarter. Just a quick question, Sean. Early on in your prepared remarks, you referenced the fact that you have experienced in North America having lived through the era of pricing pressure and deregulation. The word deregulation, was that a reference to the airline industry or was that a specific reference to the GDS industry? And I'm thinking here with regards to the current European Commission's investigation and nature of the contracts you have with the carriers and if you loose the most favored nation clause within those contracts, would you anticipate that then is the catalyst for an era of pricing pressure within the European GDS market?

Sean Menke -- President and Chief Executive Officer

Yeah, Neil, pretty broad question there. But let me try to walk through it. So when I talk about deregulation, deregulation really of the GDS industry that happened in the mid-2000's I think it was about 2005, 2006. And really what transpired in that is that, the GDSs went and they negotiated new agreements with airlines and then in the past what ended up happening from there is the GDSs are negotiated with the travel agencies that had to do an opt-in agreement. So there is a sententious[Phonetic] step down in fees that took place relative to the fees from airlines and then the commissions to or the incentives paid to the agency community. And that's what we talk about that. If you look at the U.S. marketplace it has gone through that change.

And I'm going to share a couple of numbers with you, because I think it's pretty important relative to how we see the North American marketplace, why we feel good about our position here, but if you look at and this ties into because we get a lot of questions to Neil about just what's happening on the capacity growth side of the equation. So if you look at the North American marketplace, North American capacity and this is going to be full service carriers as well as low cost carriers, so in total. In 2018 capacity growth is right around 5% and you had GDS growth, that was at 3.9%. And we always look at that gap, what is that gap, because you're going to have, specifically with growth of low cost carriers are growing at a higher rate, they have a higher propensity of direct booking. So that gap was about 1.1% when you look at 2018. But that's interesting when we look at the first half of 2019, is that capacity has slowed down as we know in many places around the world at 3.3% but GDS bookings grew at 2.8%. So that gap was actually half a point. And what that tells me is really strong GDS marketplace in North America. And I think it goes back to some of the changes that have taken place over time.

When I look at the European marketplace, part of what we're seeing, I think this goes into what IAG, Air France-KLM as well as the positive and focused on is, one the competitive environment there, bu the cost of distribution. And as we've had conversations with all three of those groups, that's a big part of what they're focused on. And in doing that, I think this is where if you see the model evolving and it goes back to why, when we look at and not be just the old way that we have sold and help sell or create offers but it's the new way as well and I think that's the pressure that you're seeing definitely in the European marketplace. And again we've walked you through why we're being less impacted but I continue to see that marketplace evolving over the next several years.

Neil Steer -- Redburn -- Analyst

Okay, thanks very much.

Operator

Our next question is coming from the line of Jed Kelly with Oppenheimer. Your line is open.

Jed Kelly -- Oppenheimer -- Analyst

Great. Thanks for taking my question. Just on Travel Network's margins on your presentation, I think it said, excluding the accelerating technology expense recognition, they would have been down only like a 180 basis points. I mean, how much of that is related to depreciation versus incentives moderating? And then on your comments on Travel Network margins expanding in 2021, I mean, what type of macro environment, does that assume. I mean, can they still expand we are later in the cycle. How do they -- how do margins work in a say potential recession or any macro weakness?

Sean Menke -- President and Chief Executive Officer

Sure. Yeah. So with regards to the comments what I'm trying to do with regards to the, what would happen if that we had, had the same capitalization mix, that's what I was trying to do when I gave you that. The reason why the margins were down even excluding the capitalization mix in Q2 would have been the fact that, as I mentioned in my opening remarks, the average booking fee dropped 60 basis points and there was even though it was really nice to see the growth in the incentive fee come way down, that's still would impact your margins. That's what drove the margin depression even excluding the capex mix for TN in the second quarter.

As we move forward and we move out into the out years it will be nice to see we'll eventually get to the point to where the growth in average booking fee begins to almost normalize and equal what's going to happen with incentive fee and then you'll get leverage coming out of your tax spend because as tax spend grows over 1% and the top line is growing, call it 4% to 5%, you'll get margin expansion and that will be really pretty much in any economic cycle.

Jed Kelly -- Oppenheimer -- Analyst

Okay. Thanks for that. And then just on the comments earlier on contracts up from a legacy competitor. I mean can you just discuss your strategy. I know you can probably give a little you probably aren't going to give us too much but just competing against a competitor that's been entrenched with those carriers for quite some time. And then another question I have just Sean, Expedia and Lufthansa did announce a direct connect NDC contract. So can you just give us your views on that announcement?

Dave Shirk -- Executive Vice President and President, Travel Solutions

Yeah. So let me -- let me take the first part of your question there. You're right, we're not going to give you specific color, but what I would just go back to is what we're focused on. And as Sean said, we're playing to our strengths in our game which is strengthening the portfolio. Leading indicator of that, as he said, if the retailing distribution space is continuing to grow change in morph and AirVision and AirCentre a very significant part of how we differentiate that. And so when you see the growth strength of carriers picking those pieces up it just speaks to the interest level and moving and evolving the way a passenger service system is looked at in the way in which customers are looking at the market and how data and analytics play a significant part and kind of how they think about that retailing journey going forward. And we're going to continue to focus in that area, we are going to continue to differentiate our shopping, we're going to continue to differentiate our pricing and the optimization of how we're injecting machine learning into that capability set. So those are just things that we're going to continue to showcase and continue to try to drive forward and beyond that we'll try to continue to keep the customer base as happy as possibly because nothing like a good reference base to support the situation that we're in.

Sean Menke -- President and Chief Executive Officer

Thanks, Dave and Jed on your second question, is relates to Lufthansa and Expedia. Listen, I think this is part of what we're seeing in the European marketplace is that and we've seen this over several years just different airlines thinking about their distribution strategy and how do they essentially go to the marketplace. And with that, I think we're going to continue to see it we have United negotiating with Expedia, right now. I think a big part of that negotiation has to do with, and I think United has been vocal about this on how their products are being sold through Expedia. It really does get into their basic economy, but it's one that I think you're going to continue to see airlines try to press ways going back to, how are they lowering their distribution costs. If they're selling. And if you look at the tickets that are sold through Expedia and a lot of cases OTAs to the low-yielding ticket, so they're trying to find a lower cost of distribution to be able to do that. So I think that's part of it. The other thing that I I often caution airlines with, when I speak with them is the more complicated, you want to make your product offering and it doesn't matter which -- through which distribution outlet, you have to be very careful that the normalization, that is taking place. And again, it sort of goes back to what we're focused on is that listen if you want to have a strategy that's going through the indirect channel, direct channel or even direct connect. We have to make sure that we have technology that supports it. And in doing that it's why, when we look at our broad portfolio, it's just not about distribution but it does drive back into what the Airline Solutions team is doing on the PSS and how do you think about that offer creation and then how do you think about the forms of distribution and how do you fulfill that. And that's what I continue to try to educate my team on the street on as you got to look at this entire picture just not pieces of the picture and what's taking place, and that's the strategy that we're executing to.

Jed Kelly -- Oppenheimer -- Analyst

Thank you.

Operator

[Operator Instructions] Our next question coming from the line of Jim Schneider with Goldman Sachs. Your line is now open.

James Schneider -- Goldman Sachs -- Analyst

Good morning. Thanks for taking my question and apologies for the difficulty before. I just wanted to follow-up on the earlier question to start off. In terms of some of the price of clients that might be most vulnerable to competitive takeaway by Sabre, would that be, should we think about that there is being some of the legacy Navitaire contract holders is being maybe most, the biggest potential opportunity. And if you just kind of think forward when might you expect to see some announcements on some of these airline solutions wins materialize. Is that something we can expect in the back half of this year or more 2020 event? Thank you.

Sean Menke -- President and Chief Executive Officer

Yeah, yeah. Thank Jim and thanks for making your way back. and thanks for making your way back. So we don't comment, as you know on, where deals were land. If you find it and I think it is a combination of opportunities that are out there. There are some that -- and I think we find this in any business that there are carriers that have been on what I would consider to be the larger platform for a period of time that are looking for different solutions. You spoke about the Navitaire platform and there are carriers around the world that have grown to a size. And if you look at, in some cases, the investment structures and who their investors are and you have essentially looking for the capability, a broader network that gets into inner lining and codeshares, it opens up a different opportunity there. And what I mean by that is, when you look at the what I would consider to be the full capabilities of SabreSonic and even our competitors PSS on the higher end, it has capabilities to fulfill that. Navitaire, I don't believe has all those capabilities, so you have customers that are looking at change. Well, if you're going to make a change off of the -- off of Navitaire, it's really a transition. I don't care if it's a transition to SabreSonic, it would be a transition to a different portfolio. So when we look at it, there's sort of a combination of different opportunities that we see out there.

James Schneider -- Goldman Sachs -- Analyst

That's helpful, thanks. And then just a clarification, you're raising the Airline Solutions guidance on the AirVision and AirCentre strength that you saw. Just wanted to understand if you think that level of growth is sustainable over the next three quarters as well, or if there is any kind of one-time impact in those numbers right now?

Doug Barnett -- Chief Financial Officer

So look, there was some -- obviously some benefit this quarter to local installs with the new accounting treatment that benefited this quarter. That's why I gave the guidance of what we thought revenue would be in Airline Solutions for the next two quarters. So I really focus on those two quarters, JIm. I didn't go out all the way obviously to Q1 of 2020.

James Schneider -- Goldman Sachs -- Analyst

Understand. Thank you very much.

Operator

With that, I would like to turn the call back over to Mr. Menke for closing remarks.

Sean Menke -- President and Chief Executive Officer

Great. Once again, I want to thank everybody for joining us this morning. We continue to appreciate the interest and support and look forward to continuing to share the progress that we have going on at Sabre. Hope everybody has a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Barry Sievert -- Senior Vice President of Investor Relations and Corporate Communications

Sean Menke -- President and Chief Executive Officer

Doug Barnett -- Chief Financial Officer

Dave Shirk -- Executive Vice President and President, Travel Solutions

Clinton Anderson -- Executive Vice President and President, Hospitality Solutions

John King -- Bank of America -- Analyst

Mark Moerdler -- Bernstein Research -- Anlayst

Matthew Broome -- Mizuho Securities -- Analyst

Ashish Sabadra -- Deutsche Bank -- Analyst

Jim Schneider -- Goldman Sachs -- Analyst

Neil Steer -- Redburn -- Analyst

Jed Kelly -- Oppenheimer -- Analyst

James Schneider -- Goldman Sachs -- Analyst

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