Amadeus IT Group SA

MAD:AMS

Earnings Call Transcript 2018-Q3

[Operator]

September year-to-date 2018 results conference call. The management of Amadeus will run you through the presentation, which will be followed by a Q&A session. [Operator Instructions] I am now pleased to hand over to you, Mr. Luis Maroto, President and CEO of Amadeus. Please, sir, go ahead.

[Luis Maroto Camino, President, CEO & Executive Director]

Good afternoon, ladies and gentlemen. Welcome to our 2018 9 months results presentation. Thank you for joining us today.As always, Ana is here as well, and Ana will walk you through the details of our financial performance. I will focus on our most relevant recent developments.Let me start with an overview of our financial performance. In the first 9 months of 2018, we saw a profitable expansion where revenue, EBITDA and adjusted profit increased by 4.6%, 8.6% and 5.1%, respectively, driven by the performances of our Distribution and IT Solutions segment. As in the first half of the year, in the third quarter, both our revenue and EBITDA continued to be negatively impacted by foreign exchange effects, albeit to a lesser extent than in the first 2 quarters of the year. In the first 3 quarters of the year, revenues expanded by 7.7%, excluding foreign exchange effects, which are fundamentally derived from the USD-euro exchange fluctuation relative to last year. In the 9-month period, EBITDA, excluding IFRS 16 and foreign exchange effect caused by the fluctuation of multiple currencies in the period, grew at a high single-digit pace and delivered a small EBITDA margin expansion.By segments, I am going to take a bit more time to talk about our Distribution business as I have seen some concerns raised in this morning in your early notes and we don't think such concerns are totally right. Let me explain our view. As you know, the GDS industry is evolving and we have touched on these points several times in the last months. And we believe the changes are for the good even if they may produce, in a given quarter, a distorted picture. During 2018, GDS industry has grown 3.5%, well in line with evolution of the last 5 years that has been 3.3% and a similar trend of healthy traffic growth. Therefore, we don't appreciate an increase in the overall disintermediation. The average gap between traffic and GDS industry growth during the last 5 years has been 3.1 percentage points whereas in the first 9 months of this year has been 3.2. So not a relevant increase even despite the impact of different strategies carried out by the 3 major groups in the Western European region.If we look at the third quarter of the year, the industry has only grown 1.7%. To start, it is not the first time this level of growth has been seen, as you know, and we also know that after a weak performance there is usually a recovery, hence, the averages we just described. There are several reasons for this softer industry performance in the quarter: first, the traffic. Despite the fact that there is a difference, as you know, between traffic and bookings, but traffic has slowed down in the third quarter from 7% in the first half to 6% in quarter 3. Second negative impact related to the fact that 3 regions have got negative performance, Latam, CESE and Western Europe, which is very unusual due to the macro situation in Russia, Turkey, Venezuela, Argentina and the election process in Brazil, combined with Western Europe, which has been the worst performing where we continue to know the effect of the cease of operation of airberlin and weather conditions that also impacted these figures. APAC also has decelerated due to seasonality of festivities in the region. Middle East and Africa reported very limited growth. And in turn, North America continued to deliver healthy growth in the period, accelerating over first half but not enough to offset all other previous effects.With regards to Amadeus performance during the first 9 months of 2018, we have increased bookings volume, excluding Western Europe, by 8%, and our competitive positioning, overall, excluding Western Europe, by 1.1%. We have continued to lose market share in the less profitable midsized online travel agency segment in Western Europe that has translated into a slight reduction of lower markets served by 0.2 percentage point and total bookings growth of 2.4. As we have signed some new deals amongst which we can mention Carlson, we have already seen a global market surge recovery in October and the few days of November, and I am confident we are able to sustain our leadership in the business.If we look at the financials over this period, excluding negative foreign exchange effects, both Distribution revenue and contribution grew at a mid-single-digit rate, in line with our expectation, and Distribution margin diluted but less than the average of the last 5 years, which is the consequence of both the change in some of the models, for example, private channels or Meta bookings and less volumes coming from lower-margin travel agencies.In summary, we are pleased with the current evolution of the business, and we are confident about the future of this industry as we continue to invest, embracing the changes that the market transportation demands to deliver solutions in line with what our customers require.In IT Solutions, revenue grew 7.6% in the first 9 months of the year. Revenue and contribution were negatively impacted by foreign exchange effects, excluding which, both grew at a low double-digit rate in the 9-month period resulting in contribution margin expansion. This evolution was driven by steady growth in Airline IT solutions and our continued expansion in our new businesses.Our underlying evolution, excluding ForEx and excluding IFRS 16, saw solid mid-single-digit growth in Distribution and we continued to deliver low double-digit growth in IT Solutions with margin expansion. Therefore, our EBITDA saw a healthy high single-digit growth with margin expansion as we continued to see the benefits of our investments. Regarding these investments, in the first 9 months of the year, we have remained highly focused on our technology. Investment in R&D amounted to 16.9% of revenue in the first 9 months of the year. We are dedicated to support our mid to long-term growth through product evolution, portfolio expansion, new customer implementation, system performance optimization and our continued shift to next-generation technologies and cloud architecture. Finally, our free cash flow grew 1.7% in the first 9 months of the year, and our leverage stood at 0.95x last 12 months EBITDA. Pro forma for TravelClick acquisition closed on October 4, 2018, our leverage could be 1.56x EBITDA.We turn to Page 5 for our most relevant recent developments. In Distribution, we continued to secure content and expand content for our subscribers by renewal of signing distribution agreements with 11 carriers in this quarter, including Aerolineas Argentinas, Copa Airlines, Porter Airlines and Norwegian. This amounts to 35 in the first 9 months of the year. Also in August, we renewed and we're pleased to expand our partnership with some back Carlson Wagonlit among other travel agencies. Demand for our merchandising solutions for the indirect channel remained strong. At the close of September, 150 airlines have signed up for Amadeus Ancillary Services with 5 new signatures in the quarter and 79 have contracted Amadeus Fare Families with 4 new customers in the quarter. On NDC, Carlson Wagonlit, American Airlines joined Amadeus NDC-X program along with American Express Global Business Travel and BCD. They joined our already announced partners including Flight Centre and Travix. As I have explained in the past, the Amadeus NDC-X program aims to bring together all the NDC efforts across Amadeus as IT provider and as a distributor under 1 roof and is continuation of Amadeus' previous work towards the digitalization of the travel industry. NDC-X is part of the evolution of Amadeus travel platform, which will bring together all relevant content including air, hotel and other travel content from a resource to be distributed via any interface or device.On Airline IT, customer base continued to expand in the third quarter of 2018. Bangkok Airways signed up for the full Altéa suite including reservations, inventory and departure control systems. Finnair expanded its collaboration with Amadeus and contracted Amadeus Network Revenue Management. The solution will allow the airline to improve accuracy when forecasting customer demand as well as to better optimize its origin and destination network. Additionally, Southwest Airlines signed up for the full Amadeus Sky Suite by Optym with a 10-year agreement. These tools will enable the carrier to increase the efficiency and network optimization of its more than 4,000 flights a day. easyJet also contracted Amadeus SkySYM by Optym to improve the reliability of its flight schedules. Furthermore, we launched MHchat with Malaysia Airlines enabling travelers to book flights and pay through Facebook Messenger. Avianca became the first airline in Latin America to adopt the Amadeus Altéa NDC solution. And Maldivian Airlines migrated to Altéa together with Aeromar. Aeromar also implemented the Amadeus Payment Platform.We continued to advance in our new business area and particularly in our hospitality strategy. We made further progress in the rollout of the Guest Reservation System with InterContinental Hotel Group, which is now substantially complete. Over 95% of hotels have successfully migrated to the platform with the remaining hotels scheduled to migrate over the coming weeks. We are also very pleased to announce the closing of our acquisition of TravelClick, a global hospitality solution provider on October 4, 2018, upon receiving the necessary regulatory approvals.If I may, I'm going to skip Page #6 where you have some more color on the Distribution volumes as I have already covered it in my introduction. So please turn now, please, to Page 7. Within IT, Amadeus passengers boarded grew by 7.1% in the third quarter of 2018 driving growth over the 9-month period to 13.8%. This double-digit growth in the first 9 months of the year was driven by the impact from our 2017 implementation, including Southwest, Japan Airlines, Malaysia, Kuwait, Boliviana de Aviación, SmartWings, Germania, Norwegian Air Argentina, Air Algerie, MIAT Mongolian Airlines on Altéa as well as GoAir, Viva Air Perú, Andes Líneas Aéreas, JetSMART and flyadeal on New Skies and the 2018 implementation including Maldivian Airlines and Aeromar on Altéa, as well as by 7.8% organic growth. Passengers boarded growth in the first 9 months of the year was negatively impacted by the ceasing of operations of airberlin and Monarch Airlines during the second half of 2017 and by the de-migration of LATAM Airlines Brazil from our platform during the second quarter of 2018. Our new businesses continued to grow healthily. We, today, have more than 285 customers for our airport IT Solutions. Hospitality IT continued to advance well, supported by the customers' implementations and organic growth. We now serve more than 40,000 -- 45,000 unique properties with our Hospitality IT portfolio. In payments, our customer base continued to expand. We have over 1,000 customers with contracted services from our portfolio, and the volume of payment transactions processed by us deliver a double-digit growth rate in the first 9 months. Ana?

[Ana De Pro Gonzalo, Chief Financial Officer]

Thank you, Luis. Hello, everyone. So we are now on Page 9. In the first 9 months of 2018, revenue growth of 4.6% was driven by the performances of our Distribution and IT Solutions segment, negatively impacted, as we have mentioned several times, by the foreign exchange effects. If we are to exclude these foreign exchange effects, revenue increased by 7.7%. If you recall, in the first half of 2018, revenue grew by 4.1% or a high single-digit growth rate if foreign exchange effects are excluded supported by a healthy travel agency booking industry growth, 4.3%, the impact from our 2017 Altéa migrations, particularly Southwest Airlines and Japan Airlines driving passengers boarded growth of 18% and the strong performance of our new businesses. However, in the third quarter of the year, revenue grew at mid- to high single-digit growth rate, excluding negative foreign exchange effects. Growth was softer than in the first half of the year, impacted by lower air booking industry growth as we have just described and a lower PB growth rate as Southwest Airlines impact on our PB growth has anniversaried. On the other hand, as we will see later, our EBITDA margin, excluding ForEx and IFRS 16 effects, expanded nicely in the third quarter.Distribution revenue increased by 2.8% to EUR 2.2 billion in the first 9 months of the year, negatively impacted by the ForEx. As we said, when excluded, Distribution revenue grew at mid-single-digit rate over the 9-month period. Revenue growth resulted from an increase in bookings of 2% and expansive revenue per booking supported by the positive booking mix, growth from an increased weight of global bookings and declining weight of non-air bookings with a lower average fee and customer renegotiations. Distribution revenue grew 3.1% in the third quarter, negatively impacted by ForEx effects.Revenue growth in this quarter had accelerated versus the first half on the back of a softer industry growth of 1.7%, but supported by our continued average unitary revenue expansion. And parallel to this lower revenue growth, we have also had in the quarter, excluding ForEx, Distribution contribution margin expansion as contribution grew at mid-single-digit rate, benefiting from a softer increase in incentives and distribution fees.IT Solutions revenue increased by 7.6% to EUR 1.4 billion in the 9-month period, negatively impacted by foreign exchange. Excluding it, revenue grew at low double-digit rate in the first 9 months of the year and Airline IT continued to deliver healthy growth, resulting from higher PB volume and a dilutive average revenue per PB, impacted by the higher weight of low-cost and hybrid carriers in our customer base. Our new businesses also continued performing well, increasing at a double-digit growth rate, ex ForEx, supported by the organic growth and customer implementations.IT Solutions revenue in the third quarter increased by 9.2% as a result of the increase in our PB volume and an expansive average revenue per PB. And excluding the negative foreign FX in the third quarter, both revenue and contribution grew at low double-digit rates and contribution margin was broadly stable.Please turn now to Page 10. In the third quarter of the year, EBITDA grew by 9.4%, negatively impacted by foreign exchange. EBITDA growth resulted from the increase in revenue as we have just described and an increase in net operating costs positively impacted by the adoption of IFRS in 2018. Excluding ForEx exchange effects and the IFRS 16 impact, EBITDA grew at high single-digit rate in the third quarter of the year and EBITDA margin expanded. Net operating cost in the quarter, including cost of revenue, personnel and other operating expenses, increased by 2.5% positively impacted, in this case, by the ForEx and the IFRS 16 adoption. If we were to exclude the IFRS 16 impact, net operating cost increased by 4.1% as a result of the increase in personnel and other operating expense and a deceleration in cost of revenue growth, resulting from a more favorable customer mix, which reduces the unitary cost and a slower volume growth.In the first 9 months of 2018, EBITDA increased by 8.6%, up to EUR 1.6 billion, negatively impacted once again by the ForEx. EBITDA growth resulted from the positive performance of Distribution and IT Solutions and a reduction in net indirect cost as a consequence of the adoption of IFRS 16 in this year 2018. Excluding both, EBITDA grew at high single-digit rate in the 9-month period. Also in this period, the margin represented 43.1% of revenue, expanding 1 percentage point versus the previous year. This margin expansion was positively impacted by the ForEx as well as by the IFRS 16 adoption. When excluded both, EBITDA margin expanded slightly versus the first 9 months of 2017.Below the EBITDA line, depreciation and amortization increased by 13.4%. In particular, ordinary D&A was 20.1% higher than last year impacted by the IFRS 16 adoption. When excluding it, ordinary D&A grew by 10.1% due to the previously capitalized R&D costs, which has started to be amortized during the period, and to a lesser extent, higher depreciation expense.Net financial expenses declined by 33.9% or 41.7%, excluding IFRS 16 impact as a result of a lower average cost of debt and lower amount of average gross debt outstanding. Also nonoperating foreign exchange gains amounted to EUR 2.2 million in the period versus EUR 12.4 million losses in the first 9 months of 2017.In the 9-month period, our income taxes increased by 10.6%. The income tax rate for the first 9 months was 26%, higher than both the 25.5% tax rate reported in the first 9 months of 2017 and the 20.8% rate reported over the full year 2017 due to a low 2017 income tax rate, which was impacted, as you know, by a number of nonrecurring effects.The combination of growth in operating results plus the growth in D&A and taxes and the lower financial expenses resulted in a 5.1% increase in adjusted profit for the period. Adjusted EPS for the period was EUR 2.06, 7.1% higher than in 2017.Turning to Page 11. Amadeus continued investing in R&D, which we believe is fundamental to deliver sustained growth and to play a leading role in the travel space. Our investment in R&D increased by 14.4%, up to EUR 623 million in the first 9 months of 2018, which represents 16.9% of our revenue. This expense, as you know, is centered in 3 main categories. The largest is product evolution and portfolio expansion, which includes new businesses and represented about 50% of our R&D investment. During the first half of 2018 and in the third quarter, we continued investing in solutions for merchandising and personalization, amongst others, and expanding the resources devoted to our new businesses. We also progressed on the development of our platform to combine content from different sources such as from the system technology, NDC and content from aggregators and other sources. The second category is customer implementation, which accounts for approximately 20% of our total R&D investment. And the third category is internal technological projects, which amounts to almost 30% of the total R&D investment and focuses on system performance optimization and the continuous enhancement of our overall infrastructure and processes as well as cloud-based architecture and the application of new processes.CapEx is very linked to our R&D investment, which is usually 70% to 75% capitalized R&D. This capitalization only happens when there is significant visibility as to future value generation. And also other than capitalized R&D, 15% to 20% of our CapEx generally relates to tangible assets, mainly in relation to the data center and earnings. And finally, we also invest in contractual relationships and payments to travel agencies in the form of signing bonuses, which we capitalize whenever we have visibility of the revenues and clawback clauses. CapEx increased by 15.5% in the 9-month period, up to EUR 506 million, which represents 13.7% of revenue. The growth in CapEx was driven by the increase in capitalized R&D investment, and to a lesser extent, higher signing bonuses rate.In the last -- in the first 9 months of 2018, we generated free cash flow of EUR 802 million, which was an increase of 1.7%, supported by EBITDA, lower taxes, partially offset by faster-growing CapEx and a negative working capital impact. We've had a working capital outflow of EUR 120 million, negatively impacted by the accounting effects of nonoperating items such as the recognition of previously deferred revenue and bad debt provisions, timing differences in some payments and collections partly related to the charges in the contract terms with a supplier and lower taxes collections. We do expect, nevertheless, to deliver on the free cash flow outlook that we provided for 2018 by the end of this year because we expect an improvement in working capital needs during the fourth quarter.Net debt amounted to EUR 1.9 billion at the end of September with leverage amounting 0.95x net debt-to-EBITDA. Pro forma for TravelClick, closed on October 4, the leverage would have been 1.56x our EBITDA as of September 30, 2018. Following TravelClick acquisition on October 25, we have announced the cancellation of the second tranche of the share repurchase program, which was due to start on April 1, 2019.And with this, we have finished the presentation for our first 9 months of 2018, and we are now ready to take any questions.

[Operator]

[Operator Instructions] The first question comes from Adam Wood from Morgan Stanley.

[Adam Dennis Wood, European Technology Equity Analyst]

I've got two, please. Just first of all, coming back to Distribution and the comments you made earlier, Luis. I assume that the Distribution strategies you've seen by some airlines speaks to the surcharging and the push towards direct to Lufthansa and IAG and Air France KLM have done in the past. If I remember correctly, this is the first time you've mentioned this as an issue in terms of the shift. So I'm just wondering how we square the fact that you're mentioning this for the first time with your view that this isn't a major issue, and it's still more the low-cost carriers gaining share that's changing it. So could you give us more of a feel, is this a change you see in the market? Is it material? And how long an impact do you expect to have from it? And then maybe just secondly, I think you've then gone on to comments around some of the offsets to this around the strategic changes in the GDS market. Could you give us some feel for what revenues you're getting as volume shifts out of the GDS channel so into private channels, direct connects, meta bookings? Is there any way to help us understand the offsets that you'd get in other areas of the business from potential shifts on the GDS side, that'd be very helpful.

[Luis Maroto Camino, President, CEO & Executive Director]

Okay, let me start with the first part. I mean, look, yes, the main impact of disintermediation has been and it is related to low-cost carriers despite the fact that, as you know, we engage with low-cost carriers volumes, some airlines are increasing their presence on the GDS. However overall, low-cost carriers continue being the first reason for disintermediation. On top of that, and this is not new at all, I mean, airlines have been trying for the last 10 years or even more to increase their direct sales and this has generated the second piece, which varies per quarter and varies per year. Of course, we reported to you when we had the surcharge of Lufthansa, yes, we saw an increase in direct sales. As you know, we cannot disclose individual information, that's more for the airlines to say, but we saw an increase and then it stabilizes completely. So when there is a surcharge, okay, usually you have an impact on disintermediation. But what we said is that, okay, overall, even with these movements of low-cost carriers, movements of the airlines in some parts of the world, overall, we see a tendency today that has been quite similar to what we have seen in the last 5 years. Some airlines are increasing disintermediation, some airlines are decreasing. There is some stability in others. Some low-cost carriers are increasing that. But the figures year-to-date show that, okay? And that's the reality today. How things are going to evolve? Well, if we take the experience that we have seen in the past, there are some peaks and some stabilization later. It depends how the market is evolving. But that has been the reality of the past and this is what we expect going forward. I mean, you can have some impacts. It depends, of course, on the individual strategy of the airlines around the world. But this is not new. I mean, if you see probably 10 years ago, some airlines in the U.S. were taking out some fares and some classes. Now you see how the GDS industry in the U.S. is growing -- is one of the fastest-growing regions. So things evolve and change. But overall, we try to balance all the time between volumes in the business, money for the company, profitability of the volumes, also with regards to our market share, how this is going to evolve, which are the travel agencies that we believe will evolve with us into the future and this is how we are trying to manage the overall business. So yes, there may be 1 specific quarter, 1 specific airline increasing here or there. But due to the fact we are present in the whole business and value chain, due to the fact that we are a very global company, okay, has impacts in 1 region or the other and overall -- we have seen the overall year-to-date figures are very similar to this 3-point disintermediation. But by the way it was, what we were assuming at the beginning of this year and this is what we have seen in the last year, I think with the exception of last year where the GDS was growing a bit more, but you take the previous 3, 4 years, between 3% and 4% was the normal growth of the industry. And of course, as it relates to financial flows, Ana?

[Ana De Pro Gonzalo, Chief Financial Officer]

I think -- okay. So I think that as Luis is saying, we are clearly embracing all of the new ways of generating services between travel agencies, airlines and finally for the passengers, so we've -- we are involved in the private channels. We have the meta bookings. We are, as I think Luis has explained, progressing on the NDC and having agreements with both airlines and travel agencies on our NDC-X program. And this changes a little bit how we recognize in the P&L. And I think that we have also tried to explain to you that whenever there is a shift to the direct channel, we are provider as an engine for many carriers, and therefore, we have a natural hedge there. That's our revenue that is recognized within the IT Solutions. We do have revenues come in from what we provide to the metasearch, which are also benefiting of some of these movements. Because when you apply a surcharge, metasearch tends to be also a part of the ones that have, not disintermediation, but they are the ones leading bookings into the direct channels and we have revenues whenever the search is done under metasearch. We also have revenues in there what we call meta bookings. We have signed agreements with private channels with all these, the 2 carriers, both IHG and Air France KLM during this year, and that means different recognition of revenues where normally we have probably a lower revenue figure, but in terms of contribution, we have more still the same growth. And that's what, in the third quarter, you can see. We have expanded the margin, the contribution margin of the Distribution business because we have a deceleration in the cost of revenues and we have still an increase on our revenues, and therefore, a higher expansion of our margins in the quarter. Those trends per quarter may vary. What I think is more relevant is to look at the overall business performance. And I think that Luis has mentioned, if you exclude the ForEx, it's growing mid-single digit, which is well in line with what has been our outlook for this business for many years now and what we said at the beginning of 2018. And in fact, when you look at the margin for these 9 months of the year, there is still a dilution but it's less -- lower than what we have seen in previous years because, yes, you have less revenues but you also have lower cost. So overall, I think that the business is -- we understand it's more difficult for you to predict. That's why we are giving you some more guidance on how it has evolved excluding all of these impacts. But I think that we are well in line with what we were expecting.

[Operator]

The next question comes from David Togut from Evercore.

[David Mark Togut, Senior Managing Director]

[indiscernible]

[Ana De Pro Gonzalo, Chief Financial Officer]

David, we can't hear you.

[Luis Maroto Camino, President, CEO & Executive Director]

We cannot hear you. Either you are on mute or...[Technical Difficulty]

[Operator]

We'll go to the next question. The next question comes from John King from Merrill Lynch.

[John Peter King, Research Analyst]

I've got two, please. Firstly, as a follow-up on the Distribution side around some of the market share issues you've been calling out now for, I guess, 3 quarters in Western Europe related to the midsized OTAs where I think you've kind of essentially said that the economics weren't right for you. I'm wondering, as you sit here today, I realize you are not in control of your competitors, but do you expect that to be something that could be a multiyear drag? I mean, how many other midsized OTAs are out there within your base that you think that may be something that competitors would go after in the same vein? So that would be the first question. And then, secondly, a different topic on the Optym deal that you've got with -- or the Southwest deal that you've got with Optym. Could you just give us a bit detail there, what's happening? It's obviously branded Amadeus and Optym. So maybe what are the economics there? And is that a partnership that expect to be your primary solution for operations IT going forward?

[Luis Maroto Camino, President, CEO & Executive Director]

Okay. For the first question, as you mentioned, of course, we compete in the market. So our competitors will take their views about the travel agencies. We take our views and, of course, our target is to increase market share at the right economic terms and keep what we say a healthy market share growth, and that's our objective. And what I mentioned in the call is that, yes, we have seen the impact of some deals that have happened during the year. Of course, this is very global. At the end, it's the sum of everything that happens. But it was very specific to a segment in Europe because, overall, excluding that, we have continued increasing share. And thanks to some deals that we have and the fact that, okay, we continue, of course, trying to offset that, you already mentioned that in the month of October, our figures overall were positive in terms of market share and hopefully this will continue without knowing exactly, of course, how our competitors or the travel agencies will react. So my answer will be that we expect a recovery of that, that we have seen that in October and moving forward, of course, is our target. But again, depending on the economics and the kind of travel agency and how the market and the industry will evolve, we will take our own deals.

[Ana De Pro Gonzalo, Chief Financial Officer]

And regarding the product you are mentioning, John, yes, we have a partnership, a long-term partnership, with Optym and they have a solution for operations, which we integrate into our suite of products. And we have a commercial agreement as well, of course. I'm not going to disclose what the business model is there, but it is profitable in the economic sense and we also believe that gives complementary solutions, which the airlines, as you can see by the take-up of the solution, appreciate quite a lot because it engaged very well with the rest of the solutions we are providing.

[Luis Maroto Camino, President, CEO & Executive Director]

And a comment, yes, on the network planning, we have decided to move this way. I mean it doesn't mean it will be forever, we may decide otherwise. But our strategy has been to partner with a solution that in our view was very competitive.

[Operator]

The next question comes from Dave Togut from Evercore.

[David Mark Togut, Senior Managing Director]

One of your competitors announced a significant loss in the quarter to you and Sabre, the Carlson Wagonlit contract, which shifts in 2020. I believe this is the first major TMC I've seen Amadeus win in the U.S. If that's correct, does this represent an inflection point where we'll see more share gain in the U.S. driven by TMCs as opposed to OTAs?

[Luis Maroto Camino, President, CEO & Executive Director]

It's difficult to answer that. Of course, we would love to really have as much as we can from any customer. So yes, we are aiming to really get volumes from everyone from our competitors, but to say more than that is difficult. Of course, we were very pleased to convince Carlson to work with us and -- to work with us more. Because as you know, they have been working a lot in the past and our target is to convince the rest of the TMCs around the world to do the same, okay? But more than that...

[Ana De Pro Gonzalo, Chief Financial Officer]

Maybe just 1 point there. You're saying that it will be in 2020 and it's not. It will start -- be in production in 2019.

[Operator]

The next question comes from Stacy Pollard from JPMorgan.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

Two questions from me. When I think about growth in Airline IT, maybe a little bit simplistic, but I think about it coming from 3 different places. So first of all, your exist -- or first of all, adding new airlines onto Altéa or Navitaire; and then secondly, the growth that you get from higher traffic volumes; and then thirdly, this opportunity to upsell and I was hoping you could maybe isolate the upsell opportunity a little bit, perhaps as a percentage of the growth that you've already shown recently. Or maybe I more think about it as what are the opportunities if the average passenger boarded is, whatever it is, EUR 0.86, could it double or is that too aggressive? That's one of the questions.

[Ana De Pro Gonzalo, Chief Financial Officer]

Okay, so let me take you on that one because as I am going to be the one saying that I'm not going to be able to provide, specifically, the information you want. I'll take my boss from being mean. I think that the 3 buckets of growth are absolutely there, the organic, the new customers plus the upsell and cross-sell of the new products. And regarding this last one, what you can see -- you don't see it in the numbers, but you can see is that there is a certain acceleration in the uptake of certain products. It takes some time until they are more mature. So we are seeing quite a good positive on revenue management where we have Singapore and Avianca has recently signed for that. We have this Optym on the operation piece, which also links precisely to the revenue management part of it. We have Flight Management, which has been quite a successful product. And then still, we have the part related to all of these new ways of selling, so the merchandising, the NDC, the Anytime, Ancillaries, et cetera, which are the ones that probably will come next into the pipeline. But to give you numbers of how much it is, unfortunately, I'm not going to be able. What we can say and I think that we've been saying that for a long time now, is that if traffic is to grow 5%, 6% on yearly basis, which is the trend that we have seen for many years right now, all of these other things, new customers plus upsell, is what allow us to feel quite comfortable in saying that the Airline IT piece should be able to grow at high single digit.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

Okay, no, that's useful. And then the second one really is about the Hotel IT competitive environment. Now with TravelClick, can you talk about how your Hotel IT offering overall really competes against the likes of Sabre or Oracle or others who use fee in the space on the ground and maybe why you might win or lose, if there's any examples of that or a sense of that competitive environment.

[Luis Maroto Camino, President, CEO & Executive Director]

Look, it's too early. As you know, we have just completed the acquisition. We are working through that. But we believe our portfolio of solutions is quite complete now with the combination of what we have and what TravelClick is bringing to the table. We are also covering the different segments in the industry. And yes, there are competitors there. But our track record -- I mean, with the previous Hospitality IT and with the deal we signed with IHG will, I believe, position us very well to compete with other players being the two that you mentioned, the biggest ones. More than that, it's difficult. I mean, I'm bullish about other opportunity that is there because it's a sizable industry and we believe we have the means now to really -- try to really capture an important part of the industry that in my view will be growing. So there will be growth for the different competitors. In my view, we are doing a number of investments. Some of our products are pretty new, and in our view, have a strong quality. Some of the products that we have inherited are very solid and are good. So overall, from a product point of view, we need to continue increasing our scope and functionalities in some of the areas, especially in the ones we have been developing, but this is part of our road map. And then, of course, one of the big challenges is that we do the right integration between the different elements that we have in the company and then we are able to really have a complete platform and an offer that will suit the needs of our customers. So look, today's a bit early to talk about the joined forces because we are in the early days. But so far, so good. I think the teams are pretty excited about this opportunity. And again, we will need to start delivering the results that are expected from this acquisition and from the investments we are doing in that space. So again, yes, we are bullish about that. We are optimistic. We feel there is a big opportunity. We feel this area is going to generate growth for Amadeus going forward, definitely, in the coming years. But it's still to be concrete about what we are doing. I mean, we are working today even if we prepare well the acquisition, but now we need to start with integration of the process of how we are going to deal with the market, and okay, on the potential gaps that we may have. But today, the offer is quite complete, I would say.

[Operator]

The next question comes from Gerardus Vos from Barclays.

[Gerardus Vos, Senior Analyst]

I just want to come back on the GDS business. I think we discussed the Western European situation quite well. I was just wondering if you could give me a bit more insight on what was happening in the rest of Europe, which started to decline in the third quarter, and similar for Latam, which is declining, and then the slowdown you've seen in APAC. Is this more kind of four-quarter issue? Or is this just a one quarter of issue? And then...

[Luis Maroto Camino, President, CEO & Executive Director]

No. Yes, in our view -- I mean, it's difficult. Our view, it's more related to a specific quarter. At least that's our feeling when we see October, but it's a bit difficult to say. I mean, in the case of Asia Pac, we believe it's completely a matter of holidays that we had in different parts of Asia because, again, we see the volumes in October are going back to their previous volumes. In the case of Latam, more difficult to predict because we have seen elections in Brazil, some impacts in Venezuela and Argentina, so I believe it will depend a little bit on the evolution of the economy. But again, I say that the figures of October, because these are the only ones that we only have, seem to show, again, a recovery in this case. But it's more difficult to predict how the economy of this region will evolve. And in the case of Eastern Europe, it's the same. We have seen in Turkey, in Russia some negative figures, which in theory should not be repeated. But I think it has to do a lot with the current economic environment, political situation, so more difficult. So I would say Asia, by all means, in my view is due to holidays. So holidays are usually recovered. In the case of the economic environment, it's more difficult to predict, but so far what we have seen in October is much better figures than what we have seen in the last part of the third quarter. So I will say the rest of the world showed better, but again, with the caveat that I mentioned because we don't have a crystal ball about that. But in theory, I mean, it's difficult that these things happened in accumulated basis in one quarter. Usually happens specific markets in one quarter. They have accumulated a little bit in the third quarter. I don't expect that in the fourth one.

[Gerardus Vos, Senior Analyst]

Okay, perfect. That's very helpful. And then on the FX, are you able to distill the FX margin impact on the third quarter, excluding IFRS 16?

[Ana De Pro Gonzalo, Chief Financial Officer]

What we have in the third quarter excluding the IFRS is expansion in the contribution margin, both of Distribution and IT Solutions. And when you exclude the IFRS and the ForEx at EBITDA level, you have -- it's more expansion, but still yet growth.

[Operator]

The next question comes from Neil Glynn from Crédit Suisse.

[Neil Glynn]

Just the first one in terms of your reporting within IT Solutions. I guess, with passengers boarded slowing to 7% in the third quarter, I guess we should see a slower run rate there in the future relative to the double digit we've seen in the past. But how does that make you think about reporting on IT Solutions with TravelClick now included in the portfolio? Will you be more inclined to give us a bit more of a breakdown as the PB growth rate is more and more different from the top line growth rate? Just interested in your thoughts there. And then the second question on R&D. Obviously, Ana, you touched on the very strong focus on R&D, completely understand that. It was 18% of revenue in the third quarter, 17% for the 9 months, which is the highest in a number of years. So just want to understand, should this level remain elevated or even grow as you continue to execute on the NBU strategy?

[Ana De Pro Gonzalo, Chief Financial Officer]

Okay, so let me take those two in-depth. The passenger growth -- the passenger boarded growth, of course, has decelerated as the largest impact of the double digit, which was the Southwest migration, has anniversaried. So once you remove that, you go more to an organic and then you will have some years or some quarters where the full year impact of migrations are still to happen like Air Canada, et cetera, and of course, the fact that the low-cost carriers on the New Skies platform grow a little faster will produce. But yes, in absence of a strong migration, our passengers boarded tend to grow their organic growth, which in traffic, as I was saying before, tends to be around 5%, 6%. So we have been considering how to improve the reporting. And clearly, after TravelClick acquisition, Hospitality is taking even a larger weight on our numbers. And therefore, we understand that we need to provide you with more visibility on this part of the business. So we are considering several parts, I think, that throughout 2019 we will have to come. And not only because of Hospitality, but also because of these new dynamics that we were precisely touching upon at the beginning of the call on Distribution, how the impact of meta bookings or private channels or the NDC, how we allocate these kinds of revenues between Distribution and IT Solutions sometimes becomes a little bit more of a blurry line. So we are clearly thinking and hopefully during this 2019, we will come back to you with a proposal on how we are going to be reporting in the following years. I don't think we're going to be able to change in 2019, but probably it's going to be the year where we are testing how the new way of giving more visibility into Hospitality and better explain the way Distribution is evolving can work. So on that one, the answer is, yes, we are looking at it. Then in regards of the R&D, I think that also you have 2 reasons why this year you have a higher percentage, one of which is also appliable to CapEx is, if you remember, we have changed IFRS 15, so we have removed what used to be on the revenues, which is TA IT revenues that are now net on the cost of incentive and that has increased by 1 percentage point, both our CapEx and our R&D. And I think that when you are looking at the evolution, you are not taking that into account. I would say that if you are to remove this impact, which is we have reduced our revenues by a few accounting system, combined with the fact that I was talking before that some of the new distribution models will reduce the revenues, although they remain, the contribution implies an increase on this ratio, both of R&D on revenues and CapEx on revenue. But it's not that we have increased more. We are still doing big efforts on customers' implementations, on new solutions and on our internal technology enhancement, but in line with what we were expecting and with the guidance that we gave you.

[Operator]

The next question comes from Michael Briest from UBS.

[Michael Briest]

Two for me as well. Luis, just going back to Western European bookings. If you think about private channels, they sort of came in, in springtime sort of Q1, Q2. Should we assume the drag effect from them continues to be as severe as it has been on bookings in Q4 and perhaps Q1 next year? Or are there any mitigating features? And then, Ana, just in terms of TravelClick, what sort of contribution should we be having in for Q4 for revenues there?

[Ana De Pro Gonzalo, Chief Financial Officer]

Okay. Let me try to -- if I have understood properly and if not, you ask the question again. If what you are saying is, are we having more losses, it's basically no. It's the same once you lose a travel agency, the bookings continue to be low. So if you have a weaker industry and you continue to add to that, the loss of the market shares, you keep on losing. But it's not that we are -- keep on adding more and more travel agencies that you lose. So there will be an anniversary of this market share loss somewhere along the mid-2019 as they will match if the rest -- we maintain the rest of the travel agencies working with us and a little bit of catch-up ones. The new deals that we are signing may come in, which I think is what Luis has mentioned at the beginning. And in terms of TravelClick, we will be adding, from October 4 onwards, so that's November, December and 26 days of October, the revenues and all of the P&L line. But you need to take into account that we have the acquisition cost, which go in one go as the closing has been performed, so we don't expect any impact at net profit level because one thing is offset by the other one. When you will have the real impact of the TravelClick acquisition will be in the numbers of 2019.

[Michael Briest]

But it will be about just under EUR 100 million of sales maybe?

[Ana De Pro Gonzalo, Chief Financial Officer]

We gave you the -- at the time of the acquisition, if you remember, Michael, we gave you the expectation -- the numbers of 2017 and the expectations of growth we had. So if you do an extrapolation of that and you create months, you will get more or less the figure of the revenues.

[Luis Maroto Camino, President, CEO & Executive Director]

And of course, I mean, at the time of the closing of the year, we will provide you guidance about how we see the evolution of the overall business, okay? Not about TravelClick itself, okay, but about the company as we do every year. And then you will have seen also that this is, of course, positively impacted by the TravelClick acquisition in the growth of the company next year.

[Operator]

The next question comes from Neil Steer from Redburn.

[Neil Steer, Partner of Software and IT Services Research]

I've just got a couple of quick ones. Firstly, just following on, on the -- you've had a number questions on private channel deals. Obviously, if an agent is using a private channel, they're still effectively still using the GDS system. So do those private channel bookings count as GDS bookings as you report them? Or are they -- once a private channel is established, are they now taken outside and not reported as a GDS booking, as your OTA bookings?

[Ana De Pro Gonzalo, Chief Financial Officer]

We count them.

[Luis Maroto Camino, President, CEO & Executive Director]

No, the private channel, they are part of the GDS, correct. What is not part of the GDS is that they are coming from metasearch, metasearch bookings. They are not private channel, but they go through metasearch. Even if -- okay, we can say this disintermediation, but at the end metasearch intermediator as we know. We are technology providers of the majority of the metasearch, so we are behind that. But then the booking is not counted as GDS because it goes directly to the direct channel of the airline.

[Neil Steer, Partner of Software and IT Services Research]

Okay. Just secondly, one of your competitors talked about Russia being down, I think, the third quarter. They suggested a figure of 9% in terms of market volumes. You yourself called out, I think, in the second quarter that the World Cup was causing a little bit of headwind as a trend. Did that -- was that -- firstly, can you concur that 9% was indeed the decline of bookings in the Russian market? And do you think that, that was also impacted by the World Cup or was that just purely economic impact?

[Luis Maroto Camino, President, CEO & Executive Director]

Look, it's difficult to read. I don't have here in front of me the exact figures, but I already mentioned as part of the decrease of CESE that Russia was behaving negatively. Difficult to know. Usually, what we have -- in the World Cup, I mean we always see in these kinds of events, World Cup or Olympic Games or whatever, a strange behavior, usually anticipation of bookings and then no bookings during the period. So it's part of that I'm sure has impacted the volumes, and part of that, I am sure is economic. So we need to see how things evolve. That's why I was saying that in theory we should see a recovery. But I think, yes, I get the confirmation that this figure was right, okay? So this decrease is a bit high. And -- okay, let's see how things evolve. It's more difficult to predict. But in theory, some of this impact should be over as we move forward. I mean, that's what has been a positive market in the past, yes.

[Neil Steer, Partner of Software and IT Services Research]

Okay. And then obviously with Lufthansa now, Air France and IAG moving along the route to surcharge. When Lufthansa started doing this some 3-years-or-so ago, I believe that there was movement in the home markets, so Austria -- so Switzerland and Germany, from the indirect to the direct channel. But that appeared to have stabilized over a period of time. The question is has that stabilization been retained or has there been further creep? And would you anticipate the same stabilization process occurring for both IAG and Air France KLM as they pursue similar strategies?

[Luis Maroto Camino, President, CEO & Executive Director]

I mean, look, I think you are completely right. Of course, we don't know how things will evolve in the future. We have the experience of Lufthansa. So what we see is that when there is a removal of content and an increase of surcharges, what you see a jump and then stabilization. That's the way it has worked in the past and this is the experience we had with Lufthansa. Of course, it doesn't mean that the rest of the airlines don't try to continue to increase somehow the direct sales. This is part of the game that has happened during many years. But we also feel there has been a limit in disintermediation and we see it with many airlines. So our expectation is that this should be the same with other carriers. But of course, depending on the strategies that they follow, this may change. What we have seen, yes, is that mainly this traffic was coming from some specific segments of the market where the airlines have more leverage, have more ways to really compete on the leisure side much more. So there is usually an increase in the stabilization every time that these movements happen. But again, we need to see what happens now in general, yes.

[Neil Steer, Partner of Software and IT Services Research]

Okay, very helpful. And when does Canada move over, the migration time for Air Canada?

[Ana De Pro Gonzalo, Chief Financial Officer]

Beginning of 2020.

[Luis Maroto Camino, President, CEO & Executive Director]

Yes. And one comment related to the previous point. I mean, as you know, we have agreed this private channel, okay, with airlines. And therefore the private channel also is a way to really mitigate this impact, which was not the case when the Lufthansa surcharge started. So in theory, the impact should be less than what we have seen in Lufthansa.

[Operator]

The next question comes from Alex Tout from Deutsche Bank.

[Alexander William Tout, Research Analyst]

Just wanted to focus on CapEx a little bit. It looks like year-to-date, your CapEx is up 120 bps as a percentage of revenue when you adjust for IFRS 15. Just wanted to ask how much this is driven by higher incentives to travel agents versus R&D investment and other drivers of CapEx. I think you said that it's driven by new products, but I thought that most of the development in relation to, example, Hotel CRS was already complete. So could you please be a bit more specific on exactly which products are absorbing so much CapEx at this point? And can we expect any moderation in the level of CapEx going forward from this quite significant increase this year. Or do you expect to keep needing to invest around the NDC-type developments and paying higher incentives to agents?

[Ana De Pro Gonzalo, Chief Financial Officer]

Okay, let me try to clarify. The largest part of increase in CapEx comes from capitalized R&D. So there is a lesser -- to a lesser extent, an increase on the signing bonuses because whenever -- if we anticipate incentives, it's not included in the CapEx. It's recognized as an advanced incentive, okay? So the only thing we capitalize related to payments to travel agencies are the signing bonuses, okay? And that we -- they are both pretty stable. You may have an impact in one given quarter or in another quarter depending on our renewal of an agreement with a given travel agency. But if you look at the trend of this year, it has not been the driver of the increase in the CapEx. The increase on the CapEx has been basically due to capitalized R&D. And here, we also have differences depending on the projects. Some projects can be capitalized more, some projects can be capitalized less by phases. There are initial phases where we probably don't capitalize as much, and then when we have a better visibility on revenues then we start capitalizing. And when projects reach to an end, then we stop capitalizing. So it's not that we -- some projects finish. So you implement Southwest and the cost -- the CapEx related to Southwest implementation decreases, but the CapEx related to Air Canada implementation starts to ramp up. We have internal projects. I think that we have clearly explained to you that after the TPF commissioning, we were investing quite a lot on movement to cloud, security, stability, et cetera. So those are projects, which are highly capitalized, maybe more than if you are developing a product which is at the initial stage. So depending on where you are allocating your resources, what kind of projects, your percentage of capitalization can be lower or higher. And it happens that in this year that percentage has been higher. Last year and the previous one, the percentage was lower. So that's basically how it works.

[Alexander William Tout, Research Analyst]

I mean, do you feel like you're kind of over the hump in the CapEx investment in some of these major initiatives? Or does that continue into '19 as well?

[Ana De Pro Gonzalo, Chief Financial Officer]

I think we gave you a range, which was to be between 12% and 15%, which is already a reduced range because of the IFRS impact I was explaining before. So that's the equivalent to 12% to 14% because there's 1 point -- percentage point of decrease just because of the change of the accounting of the IFRS 15. So in fact, we have actually reduced our range of CapEx on revenues and we are within that range. So I think that is not that we have hump or that we are spending more, it's that we are within the normal range. A range that, by the way, has been reduced by the accounting change. So I think that we are -- we don't expect -- I mean, it's business as usual and there's nothing quite strange there.

[Operator]

Thank you. Ladies and gentlemen, we have now reached the end of the results call. I now give back the word to Mr. Luis Maroto for the final remarks.

[Luis Maroto Camino, President, CEO & Executive Director]

So thank you very much again for attending the call and for your interest in the company. I'm looking forward to talk to you with the full year results. Thank you.