Earnings Call Transcript - SABR Q3 2023

Operator, Operator

Good morning, and welcome to the Sabre Third Quarter 2023 Earnings Conference Call. My name is Felicia and I will be your operator. As a reminder, please note today's call is being recorded. I will now turn the call over to the Senior Director of Investor Relations, Brian Roberts. Brian, please go ahead.

Brian Roberts, Senior Director of Investor Relations

Thank you, and good morning, everyone. Welcome to Sabre's Third Quarter 2023 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 Sabre Investor Relations web page. A replay of today's call will be available on our website later this morning. We advise you that our comments contain forward-looking statements that represent our beliefs or expectations about future events, including the impact and extent of the ongoing recovery from the effects of COVID-19, industry trends, benefits from our technology transformation, commercial and strategic arrangements, strategic priorities, our financial outlook and targets, expected revenue, adjusted EBITDA, free cash flow, costs and expenses, cost savings and reductions, margins and liquidity, among others. All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. More information on these risks and uncertainties is contained in our earnings release issued this morning and our SEC filings, including our third quarter 2023 Form 10-Q. Throughout today's call, we will also be presenting certain non-GAAP financial measures. References during today's call to adjusted operating income, adjusted net income, adjusted EBITDA, adjusted EBITDA margin, adjusted EPS and free cash flow have been adjusted to exclude certain 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. Participating with me are Kurt Ekert, President and CEO; and Mike Randolfi, Chief Financial Officer; Scott Wilson, EVP and President of Hospitality Solutions, will be available for Q&A after the prepared remarks. With that, I will turn the call over to Kurt.

Kurt Ekert, President and CEO

Thank you, Brian. Good morning, everyone, and thank you for joining us today. We had a successful third quarter and have a number of recent accomplishments to articulate on today's call, including financial results that exceeded expectations, new developments in our strategic partnership with Google, important commercial wins and development successes, as well as the continued execution of our technology transformation. In the third quarter, we exceeded our financial expectations and this performance gives us confidence that our strategy to drive sustainable growth with a more efficient operation is delivering results. The positive momentum that we saw earlier in the year has continued. Our four strategic priorities, which I will review shortly, are unchanged and form the foundation of resource allocation and strategic decision-making. Before jumping into the details of today's call, allow me to commend all of Sabre's employees for their hard work and dedication to meeting the needs of our customers. The strong results we are sharing this morning would not be possible without the commitment of all of our team members around the world. Now I will walk through the agenda for today's call. On Slide 4, you can see an overview of the topics Mike and I will cover. First, I will review our business highlights from the third quarter, and then I will describe trends that give us confidence in the fundamentals of our business and Sabre's ability to deliver on our priorities. Next, I will provide details on our customer successes and innovation achievements during the third quarter, and then update the progress on our technology transformation. Finally, Mike will take you through the financial results for the third quarter and provide an update to our 2023 outlook. Turning to Slide 5. As we have mentioned in recent quarters, these are the four key strategic priorities that drive the long-term direction for the company. As I refer to each priority, I will discuss our accomplishments that highlight our progress towards achieving each of these objectives. First, generating positive free cash flow and delevering the balance sheet remain our most important financial objectives. Solid revenue growth and meaningful cost actions combined to deliver better Q3 results than we had anticipated. Our performance translated into nearly a 100% flow-through of revenue growth to adjusted EBITDA, which helped deliver solid free cash flow in the quarter. This flow-through is illustrative of the strong operating leverage potential of Sabre tied to future top line growth. And as Mike will describe in more detail later, we have also taken significant steps toward derisking our balance sheet by extending the vast majority of our 2025 maturities out to 2027 and beyond. On our second priority, which is to achieve sustainable long-term growth, we again increased Sabre's share of industry air distribution bookings on a year-over-year basis during the third quarter. We also saw sequential share gains from the second to the third quarter as our efforts to expand our reach with both agencies and airlines continue to show positive results. In addition, I am pleased with our recent customer wins and new product announcements that we achieved this quarter, and I will provide more details on these topics in a moment. Turning to Hospitality Solutions. Our team continues to execute well and delivered excellent top and bottom line growth in Q3. And please keep in mind that the strong results delivered by the team this year do not yet include incremental business from our recently announced agreement with Hyatt. I am excited about the recent developments that support our third strategic priority, which is to drive innovation and enhance our value propositions with existing and new customers. While our technology transformation to migrate from mainframe to Google Cloud has been moving at pace over the past few years, another team of Sabre engineers has been co-developing products and solutions utilizing Google's state-of-the-art AI and machine learning capabilities. Several of our recent announcements show the powerful results of this and other key strategic partnerships. For example, our new agreement with Virgin Australia takes that carrier's revenue management capabilities to the next level by harnessing the power of Sabre's AI-driven retail intelligence suite, our next-generation solution, powered in part by Google's machine learning technology. Under this unique agreement, Virgin Australia will deploy our Air Price IQ and Ancillary IQ solutions to utilize flight and market insights to transition from static pricing rules to more dynamic real-time airfare and ancillary offers. In addition, we recently launched Sabre Upgrade IQ, a PSS-agnostic revenue management solution that will help our airline customers deliver more personalized and tailored offers to better manage premium cabin inventory. This powerful solution is the product of our strategic partnerships with both Google and Hopper. Upgrade IQ combines Google's AI technology with Hopper's advanced bidding platform to facilitate the premium seat bidding process by enabling airlines to communicate in real-time with travelers in multiple languages. Also, we launched our new Lodging AI solution which embeds Google's advanced machine learning technology to expand our suite of intelligent retailing services to hotel distribution. This new offering marks the introduction of Sabre Travel AI capabilities into the lodging sector, where we see significant opportunities to better align hotel property attributes with customer trip segmentation and preferences to deliver more personalized offerings. Last, our technology transformation to the cloud continues on schedule. We are realizing both cost efficiency gains and strategic go-to-market advantages from our cloud infrastructure and Google partnership. In addition, we are seeing significant financial benefits from our cost reduction efforts, and we are on track to realize in 2024, the full $200 million of annual reduced costs that we have previously discussed. In summary, during the third quarter, our team delivered on these priorities, and we remain focused on creating long-term value for our customers, our employees, and our shareholders. Now let's turn to Slide 6. As I mentioned previously, our efforts to drive sustainable revenue growth with a lower cost structure resulted in meaningful margin expansion and generated strong adjusted EBITDA and free cash flow growth. As this chart shows, the trajectory of our adjusted EBITDA improvement accelerated in the third quarter, and we continue to see opportunities for further growth ahead. Turning to Slide 7. During our most recent two earnings calls, we used this table to highlight the increasing share of GDS industry bookings that we have achieved. And as you can see, our share in Q3 '23 again expanded on both a year-over-year basis versus Q3 '22 and on a sequential basis versus last quarter. We are pleased with these results to date and expect that signed but not yet implemented GDS deals, a robust pipeline and our strong competitive distribution offering position us well for continued share gains and future growth. Please turn to Slide 8. I am pleased to review a number of successful business wins and differentiated product offerings with you today that span both Travel Solutions and Hospitality Solutions. We continue to see significant momentum in Hospitality Solutions. Most notably, we are well advanced in our implementation work with Hyatt to provide them with our SynXis central reservation system technology. Our platform will offer enhanced capabilities that will allow Hyatt to improve the experience of its guests. We expect to begin to go live with Hyatt starting in the first half of 2024. In addition to our work with Hyatt, Staywell, the large Australian hospitality provider, recently selected our SynXis platform to enhance and improve their IT infrastructure. In Distribution, we were pleased to sign a new agreement with Air France-KLM that includes enriched NDC-sourced content along with Edifact content to deliver modern travel reselling technology. This agreement will provide global travelers with increasingly sophisticated offers with greater choice and transparency while enabling Air France and KLM to distribute customized NDC offers powered by continuous pricing and the ability to tailor personalized offer bundles. In addition, we announced a second agreement with Air India, a top 10 global airline within the GDS industry, earlier this week to bring that carrier's domestic content to Sabre's platform. This complements our existing agreement for Air India's international content that we announced in April. Importantly, Air India's domestic content was previously exclusively offered by only one GDS, and this new agreement highlights the value of Sabre's global scale and reach to our customers and our potential to outpace the rate of growth in our industry. We also recently signed an enhanced agreement with LATAM Airlines Group, Latin America's largest airline, to distribute that carrier's traditional Edifact content as well as its NDC offers to the global network of Sabre-connected agencies. Once this new NDC connection goes live, it will enable hundreds of thousands of Sabre-connected agencies and travel buyers to have an even richer experience with a broader range of LATAM's products and services. In addition to these important agreements, we also signed with Scandinavian Airlines and Virgin Australia to provide agencies with significantly expanded access to content and offers from these carriers, including dynamically priced fares and new ancillary services. These agreements are further evidence that leading airlines seeking modern travel technology solutions continue to choose Sabre. And we are hard at work building the leading next-generation multisource travel ecosystem to seamlessly incorporate personalized NDC offers alongside other content. On the agency front, we signed a number of agreements with both new and existing customers in Q3, some of which we have announced. Examples include our new win with Unififi, a high-growth Chinese business growing into North America; a deepening of our relationship with Lastminute, one of the top European OTAs specializing in dynamic packaging; and a renewal with Tide Square, a large and cash-growing agency based in Korea. In IT Solutions, as mentioned earlier, Virgin Australia selected our intelligent retailing solutions. This partnership will bring the power of Sabre's Air Price IQ and Ancillary IQ solutions to help Virgin Australia move to more dynamic pricing and intelligent real-time offers, all powered by Sabre Travel AI. During the quarter, we also signed a SabreSonic contract extension with Air Serbia, a Raddix renewal with Safair, and an agreement to migrate Saudia's network planning and optimization to SaaS. In summary, Sabre achieved a number of commercial wins during the third quarter that will help us deliver on our strategic priorities. I will now move on to our technology transformation. Please turn to Slide 9. Our technology transformation continues on track to deliver our previously articulated cost savings and operational targets. As you can see in the table at the right, our unit cost of compute continues to decline. The significant efficiency gains we have seen from moving off of the mainframe to Google Cloud helped drive the 10% decrease in our overall adjusted technology costs that we reported in the third quarter on a year-over-year basis. In terms of operational milestones, we are on track to complete the Tulsa mid-range server exit by year-end as we have communicated previously. Overall, our technology transformation and innovation are cornerstones of our competitive capabilities, and we expect to continue to leverage our important strategic partnerships and offerings to deliver better overall experiences to both buyers and suppliers within the global travel marketplace. Now on to Slide 10. In closing, we again delivered on our priorities in the third quarter. We generated significant margin expansion and strong free cash flow, signed important customer agreements, and launched compelling products that utilize the best-in-class technology capabilities of our key strategic partners. I am proud of our team for delivering these results, and I am confident that Sabre is well positioned to continue delivering on our strategic and financial priorities in the coming quarters. I will now hand the call over to Mike to walk you through our third quarter performance and our full year 2023 expectations.

Michael Randolfi, Chief Financial Officer

Thanks, Kurt, and good morning, everyone. Please turn to Slide 11. As Kurt mentioned, we have a number of accomplishments to share with you that highlight the hard work of our Sabre team members. The third quarter was a strong quarter for Sabre and an important inflection point in several of our key financials and strategic metrics. We exceeded guidance in the quarter on solid revenue growth and cost actions that led to significant margin expansion and strong free cash flow generation. Our technology transformation and previously announced cost reductions helped drive operating costs down on a year-over-year basis. The powerful combination of steady revenue growth and falling costs led to nearly a 100% flow-through of incremental revenue dollars to adjusted EBITDA. As you can see on this slide, Sabre generated strong year-over-year improvement in cash from operations and free cash flow. Hospitality Solutions continues to drive better financial results faster than we had anticipated earlier this year and is now on track to produce an approximate $40 million improvement in adjusted EBITDA this year versus last year. Additionally, our recent debt exchange offer to extend our 2025 debt maturities out to 2027 better aligns future prospective free cash flow with our debt maturity schedule. Overall, the third quarter represents an inflection point. We are delivering on the actions we set out to achieve and are generating strong financial results that represent a meaningful trajectory shift from the last few years and highlight the potential of Sabre's path forward. Please turn to Slide 12. As you can see from the table, we exceeded our expectations for third quarter revenue, adjusted EBITDA and free cash flow, and we are encouraged by the momentum we are seeing in our financial results. Strong revenue generation, coupled with the actions we have taken to lower our cost base has driven margin expansion and increased our free cash flow generation. This quarter's free cash flow generation is high at approximately 4 years. Turning to Slide 13. Q3 revenue was $740 million, an increase of $77 million or 12% versus last year. Distribution revenue totaled $525 million, a $94 million or 22% increase compared to $431 million in Q3 2022. Our Distribution bookings totaled 89 million in the quarter, a 12% increase compared to 80 million in Q3 2022. Our average booking fee was $5.87 in the third quarter, up 9% from Q3 2022 as we continue to realize favorable mix into more profitable regions and types of travel, resulting in higher booking fees. IT Solutions revenue totaled $147 million. This was a $26 million decline versus revenue of $173 million in the comparable prior year period, driven by de-migrations, the vast majority of which is the result of changes in Russian law. Hospitality Solutions revenue totaled approximately $79 million, an $11 million or 16% improvement versus revenue of $67 million in Q3 '22. The 16 points of revenue growth was driven by 7 points of Central Reservation Systems Transaction growth and 9 points of higher rate per transaction. Hospitality Solutions generated $6.4 million in the third quarter and $7.9 million of adjusted EBITDA on a year-to-date basis and is tracking to an approximate $40 million adjusted EBITDA improvement this year versus 2022. In addition, our recently announced CRS deal with Hyatt, which we expect to go live in 2024, should contribute to the momentum we are already seeing in Hospitality Solutions. Sabre's adjusted EBITDA of $110 million in Q3 2023 versus $34 million in Q3 2022 represented a $76 million improvement year-over-year. Before I move on, I will highlight the significant impact that our cost reduction program is having on our financial performance. The $76 million year-over-year increase in adjusted EBITDA in Q3 represents virtually a 100% flow-through of the $77 million year-over-year increase in revenue we achieved over the same period. Free cash flow was $39 million in the third quarter, including the impact of restructuring charges, which was better than our prior guidance for free cash flow of $20 million. Free cash flow, excluding the impact of restructuring, was $58 million, which was better than our prior guidance of approximately $50 million. This was the first third quarter since Q3 2019 that Sabre has delivered positive free cash flow. We ended the third quarter with a cash balance of $623 million. During the quarter, we used $130 million in cash from the balance sheet in connection with our most recent financing. Before moving to guidance, let's discuss the actions we took during the third quarter to address our 2025 maturities. Turning to Slide 14. I cannot thank the team enough for their hard work of shifting our financial trajectory, which facilitated the actions on our debt maturities. Our recent debt exchange offer and the private facility we executed in June have addressed the vast majority of our nearest term 2025 debt maturities. Importantly, the cash we have on the balance sheet at the end of the third quarter exceeds the cumulative debt maturities through the end of 2026. Moving to Slide 15 to discuss our guidance. For the full year, we still expect revenue between $2.9 billion and $3 billion, unchanged from last quarter. But at the higher end of our initial expectations for 2023 that we provided in February for revenue between $2.8 billion and $3 billion. Moving to adjusted EBITDA, we now expect adjusted EBITDA for the full year 2023 of approximately $345 million, above our prior guidance last quarter for adjusted EBITDA of approximately $340 million and about 10% above the midpoint of the initial guidance we provided in February for adjusted EBITDA between $300 million and $320 million. We believe continued revenue growth, coupled with the significant cost actions we have taken to improve our efficiency and expand our margins is supportive of improving adjusted EBITDA generation moving forward. And our free cash flow, as noted on our prior earnings call, we expect to be free cash flow positive for full year 2023, excluding the impact of restructuring. This includes an assumption of approximately $80 million in 2023 for capital expenditures and approximately $375 million in cash interest costs for the full year 2023. We are currently in our annual and long-term planning process, and we expect to provide more details on our 2024 outlook and 2025 targets during our Q4 earnings call in February. As a reminder, our 2025 targets for $900 million in adjusted EBITDA and $500 million in free cash flow included an assumption for industry air volume growth of 1 to 2 points sequentially per quarter. In recent quarters, we have seen industry air volume growth come in below these levels. As indicated on our May earnings call, when we discuss our long-term targets, each 1 point of air bookings growth between 2023 and 2025 is worth approximately $12 million in adjusted EBITDA on an annual basis. In closing, steady revenue growth and operating performance drove significant margin expansion for the quarter and nearly 100% flow-through of revenue to adjusted EBITDA, which resulted in meaningful free cash flow generation. In conjunction with these items, our debt exchange offer and extension of our 2025 maturities represented an important step in delivering on our strategic priorities that Kurt outlined earlier on this call. And with that, operator, please open the line for questions.

Operator, Operator

Your first question comes from the line of Jed Kelly of Oppenheimer.

Jed Kelly, Analyst

Just two questions, if I may. Great job. You mentioned that your tech costs decreased by about 10%. Is that the correct way to view the trend of those costs continuing to decline in the future? Also, Mike, referring back to your earlier comments, you indicated that the growth in the airline industry has slowed, resulting in approximately $12 million in adjusted EBITDA annually. Has there been any change to your outlook for 2025? Are you anticipating similar incremental EBITDA growth in 2024?

Michael Randolfi, Chief Financial Officer

Yes. Thank you for the question. We have made significant progress on tech costs. When we initially outlined our resource realignment and cost reduction program in May, we discussed the trends and expectations. If you take the first quarter expenses for cost of revenue tech expenses and SG&A, annualize those, and then subtract the $100 million in cost reductions expected this year, about 10% of that would come from cost of revenue, roughly 45% would impact tech costs, and around 45% would apply to SG&A. This is what will drive the resulting trends in costs. Therefore, the trends you are observing are ones we expect to maintain in terms of expenses.

Kurt Ekert, President and CEO

Jed, you may recall that as we provided the guidance and we looked out at the '25 target back in May, we articulated that $300 million of the build toward 2025 improvement would come from reductions in both our technology costs and other costs, close to 2/3 of that would be reductions in technology costs, the part of it in the next couple of years.

Michael Randolfi, Chief Financial Officer

So then further, what I would also highlight on that May call, we also highlighted and talked about our build from 2023 to 2025. And in that build, we talked about going from approximately $300 million of adjusted EBITDA to approximately $900 million of adjusted EBITDA in 2025. And there are really three components. The very first component, as Kurt just mentioned, is that $300 million. With the $300 million being comprised of the resource realignment and cost reduction program that we saw this year, which would be about $100 million of it, our technology transformation costs, which we expect to generate at least $150 million of benefit from '23 to 2025 and then also just rigor around the non-labor non-tech cost for the remainder of the bucket. That bucket and those cost savings are very, very much on track, and you see that here today. The second area we focused on was our strategic growth initiatives, which accounted for $150 million. From that amount, at least $50 million is expected to come from Hospitality Solutions, and we have observed a significant positive shift in that business. The next $50 million is anticipated from increased market share, which we achieved both sequentially and year-over-year this quarter. Additionally, areas such as payments and airline retailing are also performing very well. The third aspect, which is volume, contributes about $12 million per point. It's important to note that there are two components to consider regarding volume. In the recent period, particularly in the third quarter, we have seen some stagnation in volume, but we have managed to offset this with favorable revenue and costs. Looking ahead, airlines are indicating capacity growth generally in the mid to upper mid-single digits, predominantly skewed toward international routes, which has historically benefited GDSs. As we continue with our planning processes for 2024 and 2025, we intend to adhere to protocols and will provide a more comprehensive update on the next two years in February.

Jed Kelly, Analyst

Yes. I have a follow-up regarding the Air India contract. Could you explain the incentives you agreed to? I understand from previous management that they were hesitant to enter the Indian market due to the challenges with unit economics.

Michael Randolfi, Chief Financial Officer

Yes. Thanks, Jed. India is one of the largest GDS distribution markets in the world. As we indicated in the prepared remarks, one of our competitors had exclusive content with Air India, which is one of the larger carriers there. So this unlocks one of the largest GDS markets in the world for us, which was not previously largely addressable or available to us. So as we think about the opportunity to gain share and gain share in the emerging parts of the world, we're really encouraged about this. Commercially, and technically, the deal we've done there makes great sense for us and we think for our agency customers as well.

Operator, Operator

The next question comes from Josh Baer of Morgan Stanley.

Joshua Baer, Analyst

I wanted to ask around NDC. I think there were several press releases in the last couple of months about NDC announcements for you. Just wanted to ask what's driving the momentum now, and from a product standpoint, how you think your NDC offerings compare from a competitive standpoint? Are there still areas of investment or investment around NDC as far as your solutions looking ahead?

Kurt Ekert, President and CEO

Yes, thank you very much for the question, Josh. Currently, NDC accounts for a very small portion of airline intermediary distribution, around 1% based on our observations and experiences. This comes approximately 11 years after the launch of NDC as a concept. Nevertheless, many airlines globally express a strong interest in selling their inventory more dynamically in B2B, similar to how they do in B2C. This mechanism is intended to facilitate that process. As airlines improve their retailing capabilities, we aim to assist them in differentiating and selling their products according to their preferences. It's crucial to understand that the changes in the ecosystem go beyond merely integrating with the airline NDC API. We are focused on developing the necessary functionality for buyers, corporations, and agencies to operate in ways that enhance efficiency and user experience, avoiding the pitfalls that can arise from simply incorporating content into their existing systems. By the end of the year, we will have addressed 90% of the use cases needed by our customers, which includes approximately 600 unique new use cases. This will ensure that the entire ecosystem can maintain balance. We are creating a multisource content platform that allows us to seamlessly process both EDIFACT and NDC content and then distribute it uniformly to all buyers globally. We believe that our platform will be the leading solution in the industry for the long term, catering effectively to suppliers while being beneficial for the buyer community. We are optimistic about the future of NDC in the coming years.

Michael Randolfi, Chief Financial Officer

Yes. And the only thing I would add on that is as we discuss forward-looking commentary incorporated in that forward-looking commentary is an expectation that NDC continues to grow and our forward-looking commentary reflects that.

Joshua Baer, Analyst

Perfect. And if I could just ask one on the 2025 sort of the $900 million plus in EBITDA going to $500 million in free cash flow. You could talk through some of the assumptions on working capital in those numbers, just thinking through interest, taxes, but then also just working capital in that bridge to free cash flow.

Kurt Ekert, President and CEO

You're not going to go into too many specifics on that at this time, Josh. What I would say is we are not assuming a significant impact on working capital, either positively or negatively in 2025. But beyond that, we'll provide just a more fulsome update in February on '24 and '25.

Operator, Operator

The next question comes from Dan Wasiolek of Morningstar. You're not going to go into too many specifics on that at this time, Josh. What I would say is we are not assuming a significant impact on working capital, either positively or negatively in 2025. But beyond that, we'll provide a more detailed update in February on '24 and '25.

Dan Wasiolek, Analyst

So just going back to the $150 million growth in the 2025 guidance, I think you guys have said that at least 1/3 is coming from hospitality. Any color you can provide on how much Hyatt kind of gets you to that 1/3? And then what would you anticipate would be the implementation timeframe for Hyatt? I know you guys said on this quarter that it will begin in the first half of next year.

Kurt Ekert, President and CEO

Yes. Thank you. Good question. So when we look at the strategic growth initiatives, just to color them once again. And we looked at $150 million of EBITDA accretion between now and 2025. What we articulated was we expect to see 1/3 of that from Hospitality Solutions, 1/3 from GDS share growth and 1/3 from an amalgam of airline retailing payments, hotel attachment. Specific to Hospitality Solutions at Hyatt, we're not going to break out the details of the agreement with Hyatt but it is indicative of the traction that we're getting with SynXis, which traditionally has been the leading mid-market hotel provider. But this basically demonstrates our ability to compete and win in the enterprise CRS space. And so what I want to do is turn it over to Scott Wilson, to lead HS, if he could give more detail about the implementation and the value that we're bringing there.

Scott Wilson, EVP and President of Hospitality Solutions

Thanks, Kurt. Thank you for that. Yes. So you actually raised a couple of things that are really important here. But let's start with by piece. The implementation, as we mentioned, is going to be starting in the first half of the year and we believe that we'll be vastly continued with it by the end of next year. So most of that revenue gain that we expect through that contract is going to be fully realized by the end of next year, which we think is just a great accomplishment by the team and our partner in Hyatt. The second Kurt talked about, the SynXis platform. Overall continues to be very strong within the market. We actually have renewal rates this year at the highest they've been since the pandemic, in fact, some of the highest ever, and we continue to win new business in areas outside of the enterprise space as well. And the third key piece is the introduction of retail studio this year, which really unlocks a new TAM for us, which is around retailing in the hotel space, something that's a little bit more mature in the airline space but has a lot of growth and upside that we're seeing good traction on in the hotel space as well. You take those three things combined, and we feel very good about that $50 million that will contribute by the end of time.

Dan Wasiolek, Analyst

Okay. Great. Very helpful. And then if I can just squeeze in one more quick one. Any color that you can give on just how your booking trends have been trending over your key regions?

Kurt Ekert, President and CEO

Sure. I'll just talk about it in terms of what we're seeing in terms of recovery relative to 2019. I mean, as you know, for the most part, North America is fully recovered. What you've seen is Asia is probably still recovered versus 2019 in the mid-60s. Europe is like in the 70s. I would say the one trend that we've seen that's a little more notable. We've actually seen Latin America back up a little bit over the last few months, and that's trended back a little bit, but that's generally what we've seen.

Operator, Operator

The next question comes from Victor Cheng of Bank of America.

Victor Cheng, Analyst

I have a couple of questions. Going back to the point on revenue per booking, could you provide some insights? A 9% improvement year-on-year is impressive, and I suspect there’s a pricing component contributing to that. You frequently mention the influences of regional mix, home versus business travel, and leisure mix. My main question is whether it matters which tier of airlines the bookings belong to. I ask this because over the last few months, we've observed American Airlines and United Airlines transitioning more towards NDC, and it appears that volumes for these airlines are declining, which likely results in lower revenue per booking. Is it correct to assume that this could negatively impact revenue per booking, or am I mistaken?

Kurt Ekert, President and CEO

Victor, thank you. Let me start and then turn it over to Mike. So first of all, NDC today represents only about 1% of the GDS marketplace. So the impact on the average fee per booking is relatively small.

Michael Randolfi, Chief Financial Officer

Yes, that's a very important part. The primary driver is that we've seen a favorable mix regionally, particularly within our carrier mix. We're also seeing carriers where the average booking fee is higher. However, as Kurt mentioned, the impact from NDC has been minimal on our average booking fee. At this stage, NDC is a very small part of the industry and represents only about 1% to 2% of global intermediary distribution.

Victor Cheng, Analyst

Yes, I understand. I was looking at some data regarding U.S. Kings, which indicates that more than ten percent of NDC bookings are a part of indirect U.S. bookings. Given that GDS as a whole remains relatively stable, does this imply that as some bookings transition to NDC, GDS is missing out on that opportunity?

Kurt Ekert, President and CEO

Victor, thank you for the question. I think there's 2 things that get inflated in the industry. One is called Direct Connect, the other is NDC. Direct Connect is where typically larger OTAs have directly connected with airlines, and this started back 10 to 15 years ago. And they basically have done that without the use of GDSs. So that's nothing new in the industry. And we think that that has for a while represented about 10% of global airline intermediary distribution. That will be with United, for example. And within that, I don't know the construct of what is traditional versus NDC in terms of looking us through those pipes. What I can tell you, though, is if you look outside of that 10%, we're not seeing any change in the structure of the marketplace. Corporate, as you know, has recovered to about 75% on a unit basis of what it was in 2019, albeit much higher on a dollar basis. We believe that substantially all of that business continues to flow through our sector and in all the other forms of leisure distribution we don't think there's been a change either. So I think that what you have is that within the direct net channel, again, which has been there for quite a long period of time preceding COVID, that there may be certain activity there that carriers are calling new technology. But within the true intermediary marketplace, we don't see any change.

Michael Randolfi, Chief Financial Officer

Yes. One other thing I would highlight, Victor, is as you think about NDC and you think about economics, generally, what we're seeing is that the economics of NDC agreements look pretty similar to what you see today around most of the globe with the exception of Europe where Europe, as you know, has some of the highest booking fees around the globe. But for Sabre, that only represents 15% of our bookings, and so the transition, we wouldn't expect to have nearly a significant impact, maybe a little bit more in that region.

Victor Cheng, Analyst

Got it. Very clear. And maybe if I can squeeze in one last one. I note that passenger volumes in the Airline IT side also appears to be a tad lower quarter-on-quarter compared to 2019. If you can provide a bit of color as to kind of what's trending in there?

Michael Randolfi, Chief Financial Officer

Yes. On Airline IT, I mean, the primary impact on a year-over-year basis is going to be the de-migrations, the vast majority of which is attributable to Russia. That impact is about $33 million. If you adjust for that, you'd obviously have growth in Airline IT driven by higher passenger boarded.

Operator, Operator

The next question comes from the line of an anonymous participant.

Unidentified Analyst, Analyst

I have one question. I wanted to revisit the air bookings. It seems that the recovery has been a key theme this quarter. Could you provide some insights on whether a new level has been reached? How do you anticipate this trend moving into Q4, especially considering your earlier comments about recovery happening in other areas?

Kurt Ekert, President and CEO

Yes, thank you. In examining the GDS marketplace, which is our focus here, it has traditionally been made up of about 50% corporate or CMC bookings and 50% leisure. We have noted that corporate bookings have recovered to approximately 75% on a unit basis compared to 2019 levels. The yields for air and hotel bookings are significantly higher, leading to a recovery in dollar terms being much closer to historical averages. One factor that we believe is affecting corporate travel is the constraints imposed by corporate and procurement budgeting, which restrict growth rates year-on-year. Historically, corporate travel was a $1.5 trillion sector before COVID, experiencing a 4% to 5% annual growth rate over a 20-year period, considering events like 9/11 and the financial crisis. We anticipate that this part of the business will continue to grow as it has in the past. While there may have been some impact on the size of that sector, we cannot determine the extent at this time. Regarding leisure travel, which constitutes the other half of the GDS sector, it predominantly involves complex, long-haul international trips, whereas simpler point-to-point domestic travel is shifting towards direct airline distribution. Historically, we believe this has been the trend. Currently, capacity has not been restored significantly for long-haul travel compared to short-haul travel, which we think has had a disproportionately negative effect on the GDS business. As you mentioned, the recovery has indeed been slower than we anticipated over the past two quarters. We will refrain from commenting on future expectations except to reiterate what Mike stated: we are working towards the $900 million EBITDA target for 2025 with an initial expectation of 1% to 2% or 1.5% quarterly growth in market size based on our projections made in May. We are currently evaluating what the trend will be over the next couple of years and will provide updated guidance in February.

Michael Randolfi, Chief Financial Officer

Yes. And the only other thing I would add with regards to 2023 and our fourth quarter assumptions incorporated in that is we assumed what we've seen as current trends, which are closer to flat in the third quarter. And I would say if you back into our Q4 expectations, you could see it's amongst the best adjusted EBITDA performance in years. We would expect it to be the best free cash flow generative quarter in years. And so we're really pleased with our performance, and we are really seeing on those actions, which we can control, we're delivering.

Operator, Operator

The final question comes from the line of James Goodall from Redburn Atlantic.

James Goodall, Analyst

I just wanted to follow up on the current bookings. We've heard many U.S. and European airlines expressing optimism about an increase in managed business travel spending as we head into winter. I'm curious if the flat sequential bookings you experienced from Q2 to Q3 have the potential to rise in Q4.

Michael Randolfi, Chief Financial Officer

Yes. Thanks for the question, Josh. There are reasons to be optimistic. We've structured our guidance based on the trends we've observed from 2023. In Q3, we experienced flatter booking trends than I would have preferred, but those are the assumptions we incorporated into our Q4 projections.

Kurt Ekert, President and CEO

We believe that with our presence among TMCs managing a significant portion of the net travel business, we are well positioned to benefit as that segment of the market starts to recover. Thank you, and thank you again for joining us today. We appreciate your interest in Sabre, and look forward to speaking with you again soon. And that concludes today's call.

Operator, Operator

Thank you for your participation in today's conference. This does conclude this program. You may now disconnect.