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Edited Transcript of AMS.MC earnings conference call or presentation 7-Nov-19 12:00pm GMT

Q3 2019 Amadeus IT Group SA Earnings Call

Madrid Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Amadeus It Group SA earnings conference call or presentation Thursday, November 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ana de Pro Gonzalo

Amadeus IT Group, S.A. - CFO

* Luis Maroto Camino

Amadeus IT Group, S.A. - President, CEO & Executive Director

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Conference Call Participants

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* Adam Dennis Wood

Morgan Stanley, Research Division - European Technology Equity Analyst

* Alexander William Tout

Deutsche Bank AG, Research Division - Research Analyst

* David Mark Togut

Evercore ISI Institutional Equities, Research Division - Senior MD

* James Arthur Goodman

Barclays Bank PLC, Research Division - Research Analyst

* Julian Alexander Serafini

Jefferies LLC, Research Division - Equity Analyst

* Matija Gergolet

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Michael Briest

UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research

* Neil Steer

Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research

* Stacy Elizabeth Pollard

JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research

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Presentation

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Operator [1]

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Welcome to Amadeus Third Quarter 2019 Results Presentation Webcast.

The management of Amadeus will run you through the presentation, which will be followed by a question-and-answer session. (Operator Instructions) I am now pleased to hand over to you, Mr. Luis Maroto, President and CEO of Amadeus. Please, sir, go ahead.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [2]

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Good afternoon, ladies and gentlemen. Welcome to our results presentation for the first 9 months of 2019, and thank you for being here with us today.

As always, Ana, our CFO, is here as well, and she will walk you through in terms of our financial performance, that we usually do, and I will focus on our most recent developments.

We start with Slide 4. We are pleased to report a solid set of results today. Our performance remained strong through the third quarter despite of persisting less [robust] at our industry. The strength and resilience demonstrated by our business this quarter, once more, allows us to continue to reiterate our confidence on the outlook we gave you earlier in the year.

To review our financial and operating performance over the period. Please note the following evolutions will exclude nonrecurring [currently] acquisition-related costs and PPA adjustments. In the first 9 months of the year, we had double-digit growth in revenue, EBITDA and adjusted profit expanding by 15%, 11.1, and 11.9%, respectively. All these amounts in percentage terms. This result was driven by the steady evolution of our distribution IT solution, the TravelClick consolidation acquired on October 4, 2018, positive foreign exchange effects.

Our free cash flow in the 9 months increased by 2.2%, [expanding] 10.5% before taxes. At September 13, our net debt was $2.940 million, representing 1.34x last 12 months EBITDA.

With respect to our performance by segments in distribution worldwide Amadeus volumes increased by 0.5%. This is 3.2% growth, excluding India. This strong operating performance was delivered in the context of a weak GDS industry where our volume growth was announced by steady markets and gains in all regions, again, except for Asia Pacific, driven by the situation in India. Our global competitive position expanded by 0.5 percentage points or by 1.3%, excluding India.

North America was our fastest-growing region in the first 9 months of the year, where our volumes, they are growing at a double-digit base. In Western Europe, our bookings continued the positive growth trend started at the beginning of the year. Distribution revenue grew 5.1% in the first 9 months of the year as a result of volume growth, average revenue per booking expansion and double-digit growth in payment distribution.

IT Solutions revenue increased 31.1% over the first 3 quarters of the year. The solution was the consequence of high single-digit growth in our IT Solutions, driven by 7.1% PB, passenger boarded growth, which took place in the context of an unusually high number of airline customer bankruptcies. The growth in our IT was complemented by a continued expansion in our new businesses, delivering double-digit revenue growth plus the consolidation of TravelClick, further boosting our growth.

The consistent, also focused investment in technology over the years has been key to our success. As of September 30, R&D amounted to 17 -- 16.9% of our revenue, and it was dedicated to support our mid- long-term growth through portfolio expansion and new customer implementations, internal digitalization and transformation projects to better integrate our acquired business and enhance our performance as well as system performance of (inaudible) and our continued shift to next generation technologies and cloud architectures.

If we go to further details in the business, moving to the next slide, in distribution, during the third quarter, we continued to secure and expand content for our subscribers by renewing or signing distribution agreements, including a new and expanded Southwest Airlines partnership as well as Viva Air, the first low-cost carrier in Colombia, to offer its first through the EDS. We signed content agreements with 7 carriers, reaching a total of 19 in the year-to-date.

We also announced our strengthened partnership with Japan Airlines. Amadeus has become Japan Airlines' recommended distribution partner in Japan as the airline will gradually decommission access its local in CRS. This will further enhance the attractiveness of our value proposition in the region.

We have also reached a distribution agreement with TAP Air Portugal that includes distribution through our private channel, which, as you know, means through the GDS. The agreement also sees Tap Air Portugal joining the Amadeus NDC program with a view of making the right future NDC content available to the Amadeus Payment Platform. The industry has also addressed different players' needs. Amadeus is helping airlines to sell the way they want and further, sellers to access content in the way they need to.

We continue to make progress with our NDC program during the quarter by developing, testing and bring new United Airline content offerings to the market.

Also, AMEX Business Travel and American Airlines, processed live bookings using Amadeus NDC enabled content supported by Amadeus Travel API. We launched our NDC-enabled Selling Platform Connect, allowing sellers to view, compare, order, pay and service airline flight and services in 1 single stream with a source through EDIFACT, NDC or others APIs. In September, we received IATA NDC Level 4 certification as an aggregator, and this follows the same level of certification as an IT provider we announced in May.

Our merchandising solutions for the indirect channel continued to garner interest from customers. At the end of the quarter, we had 154 contracted airlines for Amadeus Ancillary Services and 95 for the Fare Families.

In terms of our performance and the industry context, in the first 9 months, the travel agency booking industry declined by 0.8%, and excluding India, it was broadly flat. In the third quarter, the travel agency booking industry declined by 1.1%, and again, excluding the India market, was broadly stable as a result of mixed performance by regions. The North America industry reported modest growth impacted by bad weather conditions.

Central, Eastern and Southern Europe and the Latin American industry reported growth in the quarter, supported by the recovery market context in key countries in the region, such as Russia and Brazil.

The industry in Western Europe and Asia Pac continue to decline. Please note that in these class regions in which we are the largest provider, and thus, it penalizes our global performance relative to; other providers.

Western Europe and Asia Pac were impacted by macroeconomic developments and geopolitical events, particularly affecting U.K., Germany and Scandinavia and Western Europe and India and South Korea in Asia Pac. Middle East and Africa contracted in the quarter facing adverse geopolitical tensions across the regions.

With regards to our own performance, our rev bookings grew 3% and 3.2%, respectively, in the quarter and 9 months, excluding India -- and or minus 0.3% and plus 0.5%, respectively, in the quarter and the 9-month period, including that country.

As you know, we have mentioned our Asia Pacific bookings are impacted by an Indian GDS carrier's cancellation of our distribution agreement at the end of 2019 and by the ceasing of operations of Jet Airways, an Indian GDS carrier in April of 2019. But note with expanding the effect and the weak industry background, driven by macro and geopolitical events in various large regions, to us, our positive performance to date has been driven by solid market share gains across regions of 1.3 percentage points outside of India. We have been the market share winners in the past and see ourselves as the net market winners in the medium term, fundamentally driven by our technology offering across customer segments, which is supported by consistent and continued investment in technology, our expertise in both AirIT and [TAC] and also driven by the recent size of our local market presence, with price local market understanding as well as customer support and satisfaction.

So we move to IT Solutions. Our airline IT customer base continued to expand in the quarter. Air Europa had a renewed and contracted for incremental Altéa technology, e-commerce and payment solutions. Mauritania Airlines contracted for the full Altéa Suite and payments solutions. Our upselling and cross-selling efforts continue to yield results in the quarter.

Finnair signed for Amadeus Intelligence Hub and Amadeus Airline Cloud Availability; Aegean Airlines contracted Amadeus Customer Experience Management; Ural Airlines, Amadeus Altéa NDC and Luxair, Revenue Accounting.

Malaysia Airlines also contracted Amadeus to set up a competency center to develop its next-generation mobile platform and enhance its customer experience.

In the quarter, our passenger boarded grew 8.1% to 450 million, driving 7% growth in the 9-month period. This is a result of organic PB growth of 6.5%, the positive impact from customer implementation and the negative impact from airline customers ceasing or suspending operations, as I was saying before, we have had an unusual high number of airline bankruptcies in the year-to-date, including Germania and bmi Regional in February 2019; Avianca Brasil in May 2019; Avianca Argentina in June; Thomas Cook UK, Aigle Azur, Adria Airways and XL Airways France, all of them in September, under the migration of LATAM Airlines Brazil from our platform during the second quarter of 2018.

Excluding customer airline ceasing or suspending operations during the year, Amadeus PBs grew 9.2% in the third quarter of 7.8% in the 9-month period.

Regarding Airport IT in the U.S., Memphis International Airport in Tennessee contracted Amadeus EASE while Orlando in Florida, signing up for Amadeus Biometric Integrator. Also, in Japan, Narita International Airport, we installed self-service auto bag drop units from ICM, one company we acquired in the year, across its 4 terminals to enhance passengers efficiency and bag drop times ahead of next year's Tokyo Olympic and Paralympic Games.

With regards to payments, we established a new collaboration with CyberSource, Visa's payment management platform, through which we will offer a range of advanced fraud and payment management capabilities. As part of this partnership, the CyberSource 3D secure total authentication solution has been integrated in our platform.

If we move to Hospitality to give you more color on this business that is becoming bigger for us and more important, we continue grow our customer base and to deliver solid growth. Amadeus Hospitality now offers the broadest combined IT and distribution solutions portfolio to the market composed of reservations, property and guest management solutions; sales and catering and service optimization; media and distribution solutions as well as business intelligence. These offerings grants us both resilience and opportunities through the many contact points we form with customers. We are progressing and seamlessly integrating our offering to reap the synergies and capture the big opportunity we see to cross-sell across our stack of technology. We continue to see a positive customer reaction to our vision in the marketplace. Customers want to know more about the products we offer and all the products that we are developing in our road map.

As you know, our vision for this industry is based on a single instance seems less integrated cloud platform with data and process consistency as well as micro services and guest-centric architecture.

This will allow for less -- same customers who prefer to pick and choose capabilities a la carte to do so on the platform is modeled up. Offering independent others or middle site changes who prefer a one-stop shop proposition to benefit from an integrated offering.

In terms of our performance in the year-to-date, our revenues in hospitality expanded at a double-digit growth rate, more precisely in the mid-teens, and this double-digit growth is delivered excluding TravelClick and by TravelClick standalone. The solid performance resulted from double-digit growth at each of our hospitality subsegments, as I've mentioned before. We have had a good start of the year with both renewals and new deal signatures across our solutions, portfolios and across geographies, including most recently, Sindhorn Midtown is Thailand and Kwarleyz Residence Accra in Ghana which contracted TravelClick's iHotelier and Business Intelligence Solutions. And Crown Hotels in Australia renewed our long-term partnership, involving reservations, media and distribution as well as guest management solutions.

We have also expanded our strategic alliance with Mariott International who has endorsed and recommended TravelClick solutions to its more than 7,000 properties.

InterContinental Hotel Group, Amadeus have continued progressing. We have advanced with the development of attribute-based selling functionality. We expect to be able to start rolling out this functionality to a select number of pilot hotels towards the end of 2019.

[Premiering], unfortunately, due to weak breadth strategy to accelerate growth in Germany both organically and by acquisitions, we have agreed not to continue with this project. Today, we serve over 49,000 unique properties globally across more than 120 countries. While North America is an important market for us, we have a truly global presence and see significant potential in our geographical expansion. We remain very positive on the Amadeus prospects in the hospitality industry. Our aim is to become one of the IT providers of preference to the hospitality industry, and we believe we have the foundations to and expect to continue to deliver double-digit growth in hospitality in the coming years.

I will now hand over to Ana for the details of our financial performance.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [3]

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Thank you, Luis. Hello, everyone. So I'm now going to discuss our evolution, excluding TravelClick, nonrecurring acquisition effect, as we did at the beginning of the presentation.

As you know, these include acquisition-related costs amounting to EUR 7.3 million as well as the purchase price allocation effects, which reduced revenue and EBITDA by EUR 7.8 million and EUR 5.5 million, respectively. The -- see section 3.1 of the January-September 2019 management review for all of the details. Group revenue grew by 15% in the first 9 months of the year, supported by the positive performances in distribution and IT Solutions as well as the consolidation of TravelClick. Revenue was also impacted by positive ForEx effects.

Distribution revenue grew by 5.1%, resulting from booking volume growth, as Luis has just explained, an expansive average revenue per booking, driven by a positive booking mix impact from a higher weight of global bookings and customer renegotiations, plus the positive evolution of payment distribution, which deliver a double-digit growth rate in the 9-month period.

Payment distribution enhance our revenue growth, but it had a negative impact on our margins at [BCD], a lower-margin business if we were to exclude payments, our distribution revenue growth was solid mid single-digit rate, both in the quarter and in the 9-month period.

Growing in payment distribution brings an advantage to Amadeus as it enhance our value proposition to the travel agency customer segment. In the quarter, the revenue growth was also impacted by a nonrecurring effect, excluding which revenue growth was close to 5% in the quarter. Please note, this nonrecurring effect did not have any impact on EBITDA, and it was negative in revenues per booking growth year-to-date. Revenue in IT Solutions increased by 31.1%, boosted by TravelClick consolidation, airline IT continued delivering a high single-digit growth rate on the back of higher PB volumes.

The average unitary revenue expanded, supported by the good performance of several revenue lines, including the increase in revenues from services provided to our airline customers: Revenue Management, passenger recovery and merchandising, which more than offset the dilution effect that comes from the higher [way] of low-cost hybrid carriers in our customer base.

New business grew strongly in the first 9 months of the year, boosted by the TravelClick consolidation and a double-digit revenue growth rate delivered by our new businesses, excluding TravelClick.

Within our new businesses, hospitality, which represents the largest piece, grew at a double-digit growth rate. As we have explained before, both including TravelClick, excluding TravelClick and TravelClick standalone.

And we're going to talk now about EBITDA. In the first 9 months of 2019, it grew 11.1% to EUR 1.8 billion, driven by the positive performances of distribution and IT Solutions and the TravelClick deconsolidation and positive ForEx effects, which partially offset -- were partially offset by an increase in the net indirect cost. EBITDA margin was 1.5 percentage points lower than the same period of previous years, impacted by the consolidation of TravelClick and the double-digit growth delivered by our payment distribution business, a lower-margin business as I have just explained.

Excluding the impact from TravelClick consolidation and payment distribution, EBITDA margin was broadly stable.

Let me give you some color on our operating cost. Total operating cost, excluding D&A, increased by 18% in the first 9 months of the year, negatively impacted by ForEx. Cost of revenue grew 23.8%, highly impacted by the TravelClick consolidation.

Excluding TravelClick, the underlying cost of revenue growth resulted from booking volume growth, a higher unitary distribution cost, which was primarily driven by competitive pressure and an increase in commissions paid to travel sellers for the use of our distribution payment solutions, driven by business growth, as I mentioned before.

Fixed cost, including personnel and other OpEx, grew 14%, highly impacted by the consolidation of TravelClick. Our workforce increased by 12%, or 4% when excluding TravelClick. As you know, a large part of this is R&D, as we continue to invest significantly in our programs.

Below the EBITDA line, D&A increased by 19%, driven by a 16% increase in ordinary D&A resulting from the TravelClick consolidation and also previously capitalized R&D costs, which has started to be amortized during the period.

Also, impairment loss has amounted to EUR 22.7 million and were mostly related to the specific development and implementation efforts carried out in the past for customers that have either canceled contracts, suspended or ceased operations, and investments related to the new solutions of technology, which did not, or will not, deliver the expected benefit.

In the first 9 months of the year, net financial expense increased to EUR 43.6 million, mainly due to TravelClick acquisition, impacting both nonoperating exchange losses and interest expense. Nonoperating exchange losses amounted to EUR 7 million versus EUR 2.2 million gained in 2018 and mostly correspond to hedging costs as well as hedging results and foreign exchange effects in relation to the U.S. dollar-denominated intercompany loan linked to the TravelClick acquisition.

Interest expense increased by 19% up to EUR 31.3 million as a consequence of a higher amount of average gross debt outstanding, driven also by this acquisition. In the first 9 months, our income tax expense was flat versus the previous year. The income tax rate for the 9-month period was 24.1%, a decrease versus the 25.9% reported in the first half and versus the 26% reported in the first 9 months of the previous year. This decrease was mostly driven by a recent change in tax regulations, mainly in France, resulting in an increase in tax deductions expected for the year associated with our R&D investment.

The combination of growth in operating results and in financial expense, together with the flat tax expense, resulted in an 11.9% increase in our adjusted profit for the 9-month period. Adjusted EPS was EUR 2.30, 11.6% higher than in 2018.

Turning to Page 11. In the first 9 months of 2019, our investment in R&D increased by almost 15% to EUR 716 million, impacted by TravelClick consolidation effect. R&D investment represented 16.9% of our revenues.

Our R&D, as you know, is centered in 3 main categories. The largest is new product development and portfolio expansion, which includes new businesses and represents almost 50% of our total investment. During the first 9 months of 2019, we continued investing in the Amadeus suites for Airlines as Amadeus offer suite, which includes enhanced shopping, retailing and merchandising tools as well as Revenue Management solutions. The Amadeus order suite, which includes passenger services and payment solutions among others, and Amadeus digital experience suite, including digital commerce solutions. Our portfolio for travel agencies, metasearch engines and corporations included efforts linked to our cloud-based new generation selling platform and our hospitality platform, amongst others, as well as expanding the resources devoted to our new businesses.

The second category is customer implementations, which account for approximately 30% of our total R&D investment. During the first 9 months of 2019, we have continued with our implementation work related to upcoming PSS implementation, including Air Canada and our upselling activity as well as customers of our hospitality, effort IP and payment businesses and travel sales and corporations.

And the third category is internal technological projects, which amounts to circa 3% of our total investment and focuses on system performance optimization, cloud-based architecture and the application of new technologies as well as internal digitalization and transformational projects to better integrate newly acquired businesses and enhance our performance.

CapEx is very linked to our R&D investment as typically 70% to 75% of our CapEx is capitalized R&D. As you will know, we capitalize when there is significant visibility as to future value generation. And other than capitalized R&D, 10% to 15% of our CapEx generally relates to tangible assets, mainly in relation to a data center in [Irvine]. And finally, we also invest in contractual relationships and payments to travel agencies in the form of signing bonuses, which may be capitalized when we have clear visibility on recovery.

CapEx increased by 7.5% in the first 9 months of 2019, up to EUR 544 million, which represents 12.9% of revenue. The growth in CapEx was driven by the increase in capitalized R&D investment, the consolidation effect of TravelClick acquisition and higher signing bonuses paid, which are lumpy by nature. In turn, CapEx in property, plant and equipment declined in the period relatively to last year.

In the first 9 months of 2019, and I'm now on Page 12, we generated free cash flow of EUR 820 million, 2.2% higher than in 2018, impacted by increase in taxes paid in the first quarter of 2019. The pretax free cash flow grew by 10.5% as a result of our EBITDA growth, our contained CapEx growth, working capital outflows and higher interest. The working capital outflow increased by EUR 31.3 million or 26% in the first 9 months of the year versus the previous. This increase was mainly related to advanced payments related to customer renegotiations, timing differences in some payments and collections, partially related to local taxes, and collections from customers. Our net debt amounted to EUR 2.9 billion at the end of September, with leverage amounting to 1.34x net debt to EBITDA.

With this, we have finished the presentation for our first 9 months of the year, and we are ready to take any questions you may have, and thank you for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Julian Serafini from Jefferies.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [2]

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The first question I wanted to ask you is regarding the cross-sell in the airline IT business that you highlighted. Are you primarily seeing the cross-sell take place to Altéa customers? Or do you see Navitaire customers as well taking up the various modules beyond the core?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [3]

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Well, it's mainly Altéa. But of course, we are also using our technology as much as we can with Navitaire customers. But it's mainly the integration with Altéa and the growth developed with Altéa.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay. And the second question, I'll ask you to...

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [5]

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I might -- wait, yes, and we also have non-Altéa customers, both our solutions, such as flight management. I mean, we have reported on being successful and Revenue Management, we have also sold to Alaska, we have reported that. So the -- our functionalities can be sold. But yes, I mean, the majority of the customers are taking that are Altéa customers.

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Julian Alexander Serafini, Jefferies LLC, Research Division - Equity Analyst [6]

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Okay, great. And the second question I want to ask you was on the distribution business. You talked about the private channel agreement that you stood up with TAP Air Portugal. Can you shed any light on the economics of that private channel deal for Amadeus? I mean, is it broadly the same as the traditional full content agreement? Or is it different? It would be interesting to get some detail or some color on that, if you can share that.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [7]

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Unfortunately, as you can imagine, we do not provide any color on a strategic commercial agreement with any customer. If you are more broadly talking about the overall impact on the renewal of contracts when we have content agreements with our different air providers, normally, as you know, we try to obtain neutral to positive outcomes of the overall negotiations, but we are not going to disclose any specific individual ones.

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Operator [8]

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The next question comes from Adam Wood from Morgan Stanley.

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Adam Dennis Wood, Morgan Stanley, Research Division - European Technology Equity Analyst [9]

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I also got 2 things I wanted to touch on. Just first of all, the contract in Japan on the GDS side. Could you give us any feel for how material that could be for the GDS business going into 2020? Is that kind of less than a 1% impact? Or could it be more than that?

And then secondly, Air France at its Capital Markets Day described the change in their distribution, and they were saying that a combination of direct and NDC bookings have gone from 40% to 47% of their mix over the last 2 years. And unfortunately, they don't split out what the gap is between direct and NDC. And I know you won't discuss Air France specifically.

But I wondered, just generally, if you could talk about the distribution business. The weakness that we've seen over the last sort of 6 or 7 quarters, I know less this quarter. But has that been macro-driven and India? Or is that also because you've seen some shift in these channels towards direct?

And then just secondly, on this, when we do have carriers move and look more at NDC, could you describe, again, generally, the economics for you? Is there any change or material change from what you would have had under the traditional distribution channels? And just what opportunities does that also give you on the airline IT side?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [10]

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Okay. Let's start with access, impact on Air France.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [11]

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Okay. So the migration of travel agencies out of the active platform as [France] decommission it and we are the preferred subscriber, will take time. That won't be completed before 2022. So the uptake of bookings really gradually. So we do not expect a large impact on 2020.

And overall, if you take the volumes once completed and taking into account the take-up that we may be doing, it could amount more or less up to 1% of our last [12] bookings.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [12]

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Okay. Just implement on -- I mean, apart from this specific matter, which is related to the access platform, I mean, this is very positive for us in the market. As you know, we have a very close relationship with JAL and ANA, and the business is evolving.

So this is an additional deal, an additional volume and business that, overall, is positioning us very well to really get more business in Japan overall, both in distribution and in Airline IT. So I think the impact of this deal is broader than really the pure economics of the deal.

Moving on to direct bookings, I think it's a combination of different factors. I mean, of course, India is quite important because as we have been reporting, I mean, in India, we had a decrease on the EDS in this year. And in this quarter, it was minus 20%. That was an industry that was growing double digit last year. So this is quite important in terms of industry.

Then, of course, when you see the airlines pushing for direct, specifically in Western Europe, yes, this has had an impact in moving to direct, not really related to NDC. It's more the direct channel, much more than NDC these days. So yes, there is some increase of direct sales, I would say, in the European carriers that are adopting more the strategy of some discrimination between the direct channel and the indirect channel.

But this is very full to our -- and overall, when we exclude these specific impacts, we haven't seen an increase overall of the disintermediation effect. Okay, when you exclude the specific airline points on concrete cases, plus India, overall has been quite stable. Then, of course, the geopolitical environment has had a big impact. And we have seen that in the Middle East with the situation that is happening there. We have seen the impact of some of bankruptcies of airlines, Aigle Azur and Thomas Cook, all that is having impact, but overall, hopefully, I mean, of course, the overall economic environment is difficult to predict and the geopolitical environment. But hopefully, some of these effects, such as the one of India will start to really not playing in that negative impact there has happened this year as one of the impacts happened at the end of the year, and the bankruptcy of Jet Airways was in -- at the beginning of April. So hopefully, as the time goes on, the negative weight of that and the same with the situation of the European carriers that you mentioned before.

And I don't know if there is something pending in...

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [13]

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I think you've covered it all.

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Adam Dennis Wood, Morgan Stanley, Research Division - European Technology Equity Analyst [14]

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Just around the NDC and whether that shifts to bookings that are used -- using that data standard has any material change on your economics?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [15]

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No, not really. No. For the time being, we don't expect that at all. Of course, we are dealing with airlines related to NDC. But in principle, the economics will be quite similar to the ones we have today.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [16]

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We have showcased quite low level of volumes on the...

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [17]

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Yes, the volumes on what is called NDC channel are extremely low today, extremely low.

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Operator [18]

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The next question comes from Stacy Pollard from JPMorgan.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [19]

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Just a question around the distribution revenue growth, 5%, quite impressive, given that your bookings were just 0.5%. You've listed a number of reasons. I wanted to, if you don't mind, dig in on 1 or 2 of those. You mentioned volume, booking mix, pricing, et cetera. But this double-digit growth in payments distribution, could you give us an idea of the order of magnitude in terms of the size of that business?

Secondly, there were some nonrecurring effects, just double checking what those were.

And then finally, there is FX. And I was wondering, we estimated about a 2% tailwind. Does that sound about right to you?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [20]

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Okay. So as you know, me, we will -- Stacy, I'm not going to give you precise numbers, but let me try to see if I can provide a little bit more of color.

Our distribution payment, which is B2B Wallet that we've been talking about for some years, has gained considerable traction in 2019, driven basically by new customer deals. We won't be disclosing the size, but as I mentioned during our presentation, if you are to exclude the distribution payment, the distribution revenue growth was solid, mid-single digit, both in the quarter and in the 9-month period. And relating the nonrecurring effects, which were positive in the quarter. But I think it's also important that -- to notice 2 things.

First, there were overall negative in the 9-month period. So we repeated many times that you should not look on a quarterly basis because we always have things that may go up and down, contained, renewal, negotiations, et cetera. So the overall 9-month period, the one-off has not only not been positive, but has been negative.

And then I would also like to highlight, it is a specific one on the quarter has a negative parallel effect on cost, and therefore, a negative impact on EBITDA. So this positive nonrecurring effect on the revenues in the quarter does not flow down to the EBITDA.

So I think that we have seen quite a solid underlying distribution revenue growth based on the performance of our market share gains, which has given us positive volumes despite a weak industry and despite the Indian situation and then a positive overall price performance based on the customer negotiations, the new business coming from the B2B Wallet and some positive ForEx impact. I would think that's a summary of the distribution evolution.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [21]

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Okay, quick logistics follow-up. Sustainability of that tax rate and the French R&D credits, that's -- that will be ongoing?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [22]

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So far, yes, it's been a legislation passed by the French Congress, where they're trying to support companies that invest in R&D. And therefore, you have a higher deductibility, which we believe we will end up the year in around this 24% tax rate, and that it should be the same for the following years, provided there are not any new changes. But in principle, we don't foresee changes right now.

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Operator [23]

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The next question comes from James Goodman from Barclays.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [24]

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Just the first one was, I think I heard in the preprepared remarks, the Whitbread Premier Inn contract, you've equated that. If I heard that correctly, I mean, notwithstanding the sort of change in circumstances there, I mean, what was it that made that project no longer sort of viable or an attractive return on investment?

The other one was just on the CyberSource partnership that you've announced. I didn't follow exactly how you're going to monetize that. I think it's around 3D secure. But normally, we'd expect that to be included, I guess, within most payment models. So it's sitting also in the IT services side of the business. Could you comment a little bit there around the revenue model?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [25]

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Okay. With regards to the first question, yes, I mean, we have mentioned to you, the overall business of hospitality is performing very well with Whitbread, I mean, we have discussions. They are, at the end, nothing related to the project itself at all. It was related more to their own focus in different subjects, in this case with expansion of some of the markets that I mentioned before. So the project will not continue.

However, our PMS is going well ahead. We plan to really launch that quite actively at the beginning of 2020 to really combine with some of our functionalities. So again, yes, these things happen. I mean, as we have seen in the airline, in some cases because of the situation of the airlines, in this case, well, this company has decided not to go ahead and they focus on Germany that I have stated. Well it is -- has been the main reason for this. And we will continue delivering functionalities and growth with other customers. And hopefully, again, one day with them, okay.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [26]

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And in terms of the business models around payments. What we are trying to do is that we have a double payment business on the platform, which -- where we provide services to the merchant and on the B2B Wallet, which is included under the distribution caption, while the first is included on the IT Solutions. What we're trying to do is enhance all of the functionality. And hence, this agreement that we have got with CyberSource.

So normally, on the merchant platform, the business model is that we collect a revenue fee, both from the merchant and their providers, which are connected to our platform; and on the B2B Wallet, basically, we collect a fee, but we also provide a rebate to our travel agencies' customers, and that's why you have an increase in the revenues, but you can also see an increase on the variable cost on the distribution, which is also related to this rebate that we pay to travel agencies. So those are the business models. And again, we do not provide any specifics on a one concrete deal. But those are the business models around the 2 platforms that we have in payments today.

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Operator [27]

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The next question comes from Michael Briest from UBS.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [28]

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A couple from me as well. Just on IHG as a customer. Can you sort of talk about the status of them? Are they now live in all properties with all of the functionality you're expected to give to them? Or is there still some more development work to add?

And then just in terms of NDC, I think IATA's got a plan or target of getting 20% of airline bookings or 20 airlines and 20% of bookings to NDC by 2020. Can you just talk about how credible do you think that is? And also, have you signed any airline-wide NDC agreements? Because our feedback from travel agents is that the stumbling block is not so much the technology, but the commercial agreements between yourselves, the airlines and the agents. Have you done any of those deals?

And then, Ana, just finally, on the guidance. I think there was a low-end expectation around the distribution business. Is that still something you see as feasible? Or given the results year-to-date, do you think that's no longer likely?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [29]

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Okay. Ana, let me cover the first two, please. IHG, I have mentioned during my speech, and the idea is to be continuously rolling out additional functionalities to them. We are in the piloting phase now of some of the properties, so pieces of our functionalities. And again, I mean, there are different releases that are evolving our technology on our platform as we speak. So it would take years, I would say, but this is an ongoing effort that we do with IHG to prepare to have a very solid solution for the industry. At the same time that we are also taking into account the synergies and the functionalities that we can have between the CRS that we acquired from TravelClick that is selling and evolving and the functionalities that we develop for IHG. That's what I see. So more ongoing improvement in our solution and our product and continuous releases as we speak. And as I mentioned, the pilot is now at the end of the year with the customers for attribute the base selling

With regards to NDC, yes, we have signed many contracts. I don't know exactly which ones are public, but we signed contracts and the ones...

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [30]

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Public, we said, Qantas and Finnair.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [31]

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Qantas and Finnair. So this is -- these are public contracts that we have signed, and we will continue signing with our customers.

You were mentioning about the 20%. I mean, look, it depends how you count and how you want to really put the numbers together, it depends on the connectivity, the bookings that you include. So its outlining and reporting are a bit different. But as I mentioned before, the volumes in the -- what we consider NDC are at low, and we have high doubts that this 20% will be achieved. But again, it depends how this pay is counted and whatever -- and including when they talk about NDC and connectivities via APIs or the other sources.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [32]

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And then in terms of guidance for the distribution business, we don't know the performance of the last quarter. As you can see by the numbers that we have delivered up to the third quarter, we are probably above the lower end, where, this year, we gave you a 2 scenario-based for distribution on a worst-case on India and on a normal ongoing basis, I would say that we are somewhere in between.

So despite the fact that the India has gone to the worst case scenarios, we are above the worst-case scenario that we gave you in India. Probably not as good as what would have been a normal year on distribution also because the industry is impacted by this and because what the risk has explained of a macro environment, which has deteriorated quite a lot, and we see the impact of that on the passenger's traffic, air traffic, and therefore, of course, as well on the GDS. But so far, we are growing in the mid-single digits, as I have said before, and which is both the worst-case scenario that we gave with India, despite the fact that this has not.

Last quarter of the year, the industry is still weak. It's the shortest, also, quarter for the distribution business. As you know, the number of bookings of the last quarter of the year tends to be lower, being the first quarter, the strongest. So probably, we will be above the worst-case scenario, but it's still too early to say. It will depend on the industry evolution of the last part of the year.

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Operator [33]

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The next question comes from David Togut from Evercore ISI.

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David Mark Togut, Evercore ISI Institutional Equities, Research Division - Senior MD [34]

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Two questions, please. First, you continue to gain a very substantial market share in North America, up 11.5% TA bookings in the quarter. Could you comment on the drivers and whether this is still mostly driven by OTA share gain? Or whether you're picking up any share with travel management companies?

And then second, Sabre has recently called out an aggressive plan to take market share from you in airline IT as you face a large series of contract renewals in the airline IT business. Could you comment on that dynamic and how you feel positioned to renew some of your book of business and airline IT?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [35]

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Okay. So look at the first question, yes, it's mainly online travel agencies. The increase of our share in North America is mainly coming from that. Of course, we are also getting slowly into the PMC world. And hopefully, we will get additional volumes on that front. But it's mainly online travel agencies.

With respect to what you mentioned, look, we cannot guarantee that we will not lose never a customer. That's difficult. But we think that, in general, this would be the norm. I mean, this is more based on our track record of the last years where, continuously, we are renewing contracts, both with Navitaire and with Amadeus. So this is business as usual, I would say.

So look, again, nothing else to comment. We will try to always get additional customers, renew our customers, provide a good service. And of course, our competitors will try to get customers from us. And the reality, you see the last many years, okay, overall, we have been able to sustain our customers and get additional business. That's everything I can say.

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Operator [36]

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The next question comes from Neil Steer from Redburn.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [37]

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Just a couple of very quick ones, if I could. Firstly, Ana, on access, did you suggest that the bookings -- clearly over a number of years, but it would be around about the 6 million mark? I think you referenced 1%. Is that about right?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [38]

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Well, we don't know the number. It will depend on the transfer. I think you have 2 factors. On the one hand, when you migrate travel agencies to a different platform, you have uptake and you may lose some customers.

And on the second one, I think that is very important, what Luis mentioned, which is the fact that we are now the largest provider for IT, both for Japan Airlines and for All Nippon Airways, means that, as you know, normally, that has a positive halo effect. We think that market and it's a market that differently to other regions is growing very nicely. So what we expect is a positive increase.

Now we don't know exactly how much that it is, and it will take us time to migrate. So I gave you a 1% approximate, but I cannot give you a concrete number on how much that would be.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [39]

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Okay. And on the -- clearly, in Western Europe, you've won some market share. Could you offer a little bit of a sort of greater granularity on where in Western Europe, you've been able to win some market share over the last couple of quarters?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [40]

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Well, go ahead, Ana, but look, overall, has been everywhere. I mean, it has been quite general, the market share increase that we have had in Western Europe.

I wouldn't say it's on a specific market. Of course, you have impacts here and there that you may have more in some markets than others, but the deals we have signed are very global, and we have increased, I mean, in the majority of the market, yes.

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Neil Steer, Redburn (Europe) Limited, Research Division - Partner of Software and IT Services Research [41]

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Okay. And just one final point of clarification. On the impairment charges, you suggest in the press release 2 reasons. Obviously, that's when carriers either cancel contracts or cease operations or the second reason, obviously, if the products don't deliver the benefits that you're expecting.

Is it possible to apportion those 2 reasons to the impairment charge and its magnitude in this quarter?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [42]

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The largest amount is totally related to customers canceling contracts or ceasing operations, by far.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [43]

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I think, mainly, it's the investment we have done is related to that investment to integrate that...

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [44]

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(inaudible)

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [45]

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Okay, you know how it works. I mean, this investment is in the balance sheet. And of course, the airlines have disappear. This amount is small accounting-wise than past-wise, okay? But we need to really consider that it's not any longer an asset, and therefore, the majority has been related to all the -- of the list of airlines, but unfortunately, were in our platform and cease operations. That has been the biggest majority of that we have on during the quarter.

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Operator [46]

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The next question comes from Alex Tout from Deutsche Bank.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [47]

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You mentioned a Marriott deal with TravelClick in the quarter. And that appears to have driven up the growth rate in TravelClick in the quarter up to double digit, whereas you didn't mention it being double-digit before. Do you expect that, that deal to continue TravelClick growth at the double-digit level into 2020? And then more broadly, what does that win mean for potential adoption of your CRS solution at Marriott? Are you in active discussions around that? And then I have a follow-up. Maybe answer that first.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [48]

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No, go ahead. Finish with your questions, Alex.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [49]

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Second was just more a financial one. So working capital, I think your free cash flow guidance essentially implies that, that will be a minimal positive contribution or maybe a negative contribution in FY '19. Normally, it's positive. So what is causing the delta there? And do you expect some normalization going into FY '20?

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [50]

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Okay. So let me try to answer both questions. What we have agreed with Marriott is not a contract by which they pay, it's that they endorse our solutions as recommended other properties to be installed, and they have like 7,000 properties. So that will bring is a recommendation -- that will bring revenues as properties implement the solutions, and that will support the growth.

So the growth of the double-digit that we have mentioned in all of the subsegments in TravelClick, without TravelClick, et cetera, is not because of a specific contract with Marriott. This will enhance the revenue growth in the future as the properties take the recommendation issued by Marriott and then start implementing our products. So I hope with that, I'd clarified that question.

And then in terms of free cash flow, we had a negative working capital in 2019. And for the year-end, we still expect to be negative. There are many factors that explained this. The biggest -- the largest one, if you want, is first, we use our balance sheet in a market which is a little bit more cumbersome to finance some of our travel agents when they have cash finances. So we may advance incentives so we may find larger signing bonuses, which is a cash out that impacts the working capital.

Then the second one is the recognition of revenues and cost. As you know, we have, during the implementation time, and this also has been boosted by the hospitality business, where this prepared revenue recognition is more of a norm than what we had in the airline traditional business. But when we implement airlines, we defer. So if we are collecting any money from Air Canada, which, today, we are working on the implementation, we defer those revenues. That's a positive impact on our working capital.

But when we start recognizing the detailed revenue on our P&L once we implement. And that would be the case for the implementations we have this year with S7, [Banco Philippines], et cetera, that produced a negative impact on the working capital.

So today, those -- and then we have a lot of taxes, collections, up and down the moment of recoverability, DACs in different markets, which have had also a negative impact depending on when you anticipate.

So I would forecast that for 2019, the working capital will be still negative despite that. And also based on the fact that with the lower tax rate in France, we will be paying lower taxes, which was not in our outlook. We will do a better outlook on the free cash flow compared to -- if you remember at the beginning of the year, we were telling you that this year, the range we were giving on the free cash flow was not for you to target the mix, was more based on a dual scenario.

If the worst case in India what to happen, we were going to be on the lower part of the range. If the worst case in India was not to happen, we would be more upwards that range. And despite the fact that the case in India, as I've mentioned before, is in the worst-case scenario, because of better evolution of the businesses, because contention on the CapEx and also because we will be paying less taxes because of this new legislation in France, our free cash flow probably will not be in the lowest part of the range, it will be somewhere upper despite being in the worst-case scenario in India.

So I think that but still with a negative working capital, which probably you can also project until 2020. But we will give you a guidance on free cash flow as we usually do by year-end with the end results of 2019.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [51]

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Sorry, just on the Marriott point. Is that win around Travelclick aiding discussions around the CRS also at this point? Is that an active discussion with Marriott?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [52]

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I mean, look, as you can imagine, I will not talk to you about the specific customer debate that we are having. I never do. So of course, we'll try to sell all our functionalities to the customers. The Marriott is a very important customer for us in many areas of what we do, sales and catering TravelClick, and of course, we will love to really get additional functionalities from them. That's I can say.

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Operator [53]

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The next question comes from Matti Gergolet from Goldman Sachs.

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Matija Gergolet, Goldman Sachs Group Inc., Research Division - Equity Analyst [54]

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Three questions for me. Firstly, on TravelClick. I mean, you reported double-digit organic growth or growth for TravelClick standalone. It seems to me this is a bit of an acceleration compared to what TravelClick was last year when you bought it. Can you just elaborate a little bit on what is accelerating? What is going better at TravelClick compared to when you acquired it?

Second question is, remember, the beginning of the year, you told us that for 2020, you are planning to implement a new reporting. Today, you got a lot of questions about no payments or other subdivisions. Can you share with us, say, any thoughts you currently have about, say, the reporting for next year, if possible? How is it going to be, just briefly?

And thirdly, just in terms of, say, airline IT. Could you comment a little bit about how do you see the pipeline there for, say, new clients? Do you still see any mid or large customers that you could basically sign up? Or do you think that the growth in airline IT is more a medium, small-sized customers and more ancillary services?

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [55]

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Okay. With regards to TravelClick, yes, we have accelerated the growth. That's a reality. The biggest story of growth is being on the CRS part of the different products. I mean, not all of them, but to really grow double digit, it's not just 1 specific product, but overall, the business has performed quite positively. But if I would need to highlight one, the CRS for medium-sized and independent properties that was bringing to the table as part of the acquisition has gone very well.

With regards to our airline IT pipeline, I mean, again, difficult to really mention to you. Of course, the pipeline is lower than what we used to have in the past when we were signing so many contracts 5 years ago. But still, we have both in the medium and small size satellites, we are getting traction there and we are having discussions. And of course, we have conversations with some of the big ones that are still available in the market.

So the pipeline is healthy. We are also focusing, of course, due to the big market share that we have today and the big penetration in upselling, in getting additional functionalities with airlines. So we have these 3 lines of working, one is about upselling and selling standalone modules to non-Altéa customer. We're also looking to small carriers that are available, really, and easy to implement. And then we have a specific focus and program to really what we call big deals. And still, there is a pipeline. And of course, it's much more difficult to get, much less predictable. But hopefully, some of these may become a reality.

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Ana de Pro Gonzalo, Amadeus IT Group, S.A. - CFO [56]

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And then on reporting, yes, we have mentioned several times that our intention is to report 2019 as we are doing right now. And then once we are starting 2020, we will further open up our IT Solutions to give you probably not hospitality on isolated terms, but to give you the part of which is non air, if you want, our new businesses, our growth business in a package, so that taking into account that hospitality is the largest [speed], we think that the new segment of IT Solutions, but you will have a better understanding on how that business is evolving. It won't be hospitality per se, you will have other things included there. But for sure, it would be the largest contributor on that new subsegment within the IT Solutions, which will give you better visibility. So that will start from 2020 onwards.

We will call you for our call, no worries. We will explain how it's been built, and we will give you further color so that you can understand how we are disclosing it and that you can follow-up on that one. So in due course, we will give you further details.

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Operator [57]

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Ladies and gentlemen, there are no further questions in the conference call. I now give back the word to Mr. Luis Maroto for the final remarks. Thank you.

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Luis Maroto Camino, Amadeus IT Group, S.A. - President, CEO & Executive Director [58]

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Well, thank you very much again for being with us and for your questions. And of course, you have a follow-up, you can do that with the IR team, and looking forward to release with you or talking to you in the next call with the full year results. Thank you.