14. Segment Information

Our reportable segments are based upon: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; the availability of separate financial information; and overall materiality considerations.

Our business has three reportable segments: Travel Network, Airline and Hospitality Solutions, and Travelocity. Airline and Hospitality Solutions aggregates the Airline Solutions and Hospitality Solutions operating segments as these operating segments have similar economic characteristics, generate revenues on transaction-based fees, incur the same types of expenses and use our SaaS based and hosted applications and platforms to market to the travel industry.

Our CODM utilizes Adjusted Gross Margin and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Segment results do not include unallocated expenses or interest expenses which are centrally managed costs. Benefits expense, including pension expense, postretirement benefits, medical insurance and workers’ compensation are allocated to the segments based on headcount. Depreciation expense on the corporate headquarters building and related facilities costs are allocated to the segments through a facility fee based on headcount. Corporate includes certain shared expenses such as accounting, human resources, legal, corporate systems, and other shared technology costs. Corporate also includes all amortization of intangible assets and any related impairments that originate from purchase accounting, as well as stock based compensation expense, restructuring charges, legal reserves, occupancy taxes and other items not identifiable with one of our segments.

We account for significant intersegment transactions as if the transactions were with third parties, that is, at estimated current market prices. The majority of the intersegment revenues and cost of revenues are between Travelocity and Travel Network, consisting mainly of incentive consideration provided, net of data processing fees incurred, by Travel Network to Travelocity for transactions processed through the Sabre GDS, transaction fees paid by Travelocity to Travel Network for transactions facilitated through the Sabre GDS in which the travel supplier pays Travelocity directly, and fees paid by Travel Network to Travelocity for corporate trips booked through the Travelocity online booking technology. In addition, Airline and Hospitality Solutions pay fees to Travelocity for airline trips booked through the Travelocity online booking technology.

Our CODM does not review total assets by segment as operating evaluations and resource allocation decisions are not made on the basis of total assets by segment.

The performance of our segments is evaluated primarily on Adjusted Revenue, Adjusted Gross Margin and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Revenue, Adjusted Gross Margin and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We define Adjusted Revenue as revenue adjusted for the amortization of Expedia SMA incentive payments, which are recorded as a reduction to revenue and are being amortized over the non-cancellable term of the Expedia SMA (see Note 3, Restructuring Charges). We define Adjusted Gross Margin as operating income (loss) adjusted for selling, general and administrative expenses, impairments, restructuring and other costs, litigation and taxes, including penalties, stock-based compensation, amortization of Expedia SMA incentive payments, amortization of upfront incentive consideration and depreciation and amortization. The definition of Adjusted Gross Margin has been revised in the current period to adjust for restructuring and other costs, litigation and taxes, including penalties and stock-based compensation included in cost of revenue which differs from Adjusted Gross Margin presented in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on April 17, 2014. Adjusted Gross Margin for the prior year period has been recast to conform to our revised definition. We define Adjusted EBITDA as income (loss) from continuing operations adjusted for impairment, acquisition related amortization expense, gain (loss) on sale of business and assets, gain (loss) on extinguishment of debt, other, net, restructuring and other costs, litigation and taxes including penalties, stock-based compensation, management fees, amortization of Expedia SMA incentive payments, depreciation of fixed assets, non-acquisition related amortization, amortization of upfront incentive consideration, interest expense, and income taxes.

Segment information for the three months ended March 31, 2014 and 2013 is as follows (in thousands):


	Three Months Ended March 31,
	2014			2013

Adjusted Revenue
Travel Network	$	491,726		$	475,305
Airline and Hospitality Solutions		176,717			162,448
Travelocity		96,102			142,771
Eliminations		(7,260	)		(21,180	)

Total Adjusted Revenue		757,285			759,344
Amortization of Expedia SMA incentive payments		(1,875	)		—

Total revenue	$	755,410		$	759,344


Adjusted Gross Margin (a)
Travel Network	$	236,648		$	230,657
Airline and Hospitality Solutions		65,540			54,953
Travelocity		55,516			77,892
Eliminations		(109	)		(213	)
Corporate		(14,873	)		(10,724	)

Total	$	342,722		$	352,565


Adjusted EBITDA (b)
Travel Network	$	214,843		$	210,303
Airline and Hospitality Solutions		53,460			40,870
Travelocity		(25,196	)		(8,945	)

Total segments		243,107			242,228
Corporate		(59,390	)		(49,725	)

Total	$	183,717		$	192,503


Depreciation and amortization
Travel Network	$	16,037		$	12,258
Airline and Hospitality Solutions		26,998			18,215
Travelocity		1,492			6,968

Total segments		44,527			37,441
Corporate		40,867			41,938

Total	$	85,394		$	79,379


Adjusted capital expenditures (c)
Travel Network	$	15,313		$	15,270
Airline and Hospitality Solutions		38,400			49,030
Travelocity		1,981			5,155

Total segments		55,694			69,455
Corporate		3,598			5,275

Total	$	59,292		$	74,730

(a)	The following tables set forth the reconciliation of Adjusted Gross Margin to operating income in our statement of operations (in thousands):


	Three Months Ended March 31,
	2014		2013

Adjusted Gross Margin	$	342,722	$	352,565
Less Adjustments:
Selling, general and administrative		198,877		199,829
Cost of revenue adjustments:
Depreciation and amortization⁽¹⁾		60,807		52,512
Amortization of upfront incentive consideration⁽²⁾		11,047		9,599
Restructuring and other costs⁽⁴⁾		1,216		591
Litigation and taxes, including penalties⁽⁵⁾		606		11,848
Stock-based compensation		1,506		458
Amortization of Expedia SMA incentive payments		1,875		—

Operating income	$	66,788	$	77,728

(b)	The following tables set forth the reconciliation of Adjusted EBITDA to loss from continuing operations in our statement of operations (in thousands):


	Three Months Ended March 31,
	2014			2013

Adjusted EBITDA	$	183,717		$	192,503
Less Adjustments:
Depreciation and amortization of property and equipment^(1a)		41,581			33,347
Amortization of capitalized implementation costs^(1b)		9,136			10,881
Amortization of upfront incentive payments⁽²⁾		11,047			9,599
Interest expense, net		63,944			82,530
Acquisition related amortization^(1c)		35,478			35,952
Loss on extinguishment of debt		2,980			12,181
Other, net ⁽³⁾		887			(5,126	)
Restructuring and other costs⁽⁴⁾		2,708			2,166
Litigation and taxes, including penalties⁽⁵⁾		5,152			14,638
Stock-based compensation		5,579			2,724
Management fees⁽⁶⁾		1,932			2,722
Amortization of Expedia SMA incentive payments		1,875			—
Provision (benefit) for income taxes		2,417			(4,948	)

Loss from continuing operations	$	(999	)	$	(4,163	)

(1)

Depreciation and amortization expenses:

Depreciation and amortization of property and equipment represents depreciation of property and equipment, including software developed for internal use.

Amortization of capitalized implementation costs represents amortization of upfront costs to implement new customer contracts under our SaaS and hosted revenue model.

Acquisition related amortization represents amortization of intangible assets from the take-private transaction in 2007 as well as intangibles associated with acquisitions since that date and amortization of the excess basis in our underlying equity in joint ventures.

(2)

Our Travel Network business at times makes upfront cash payments or other consideration to travel agency subscribers at inception or modification of a service contract which are capitalized and amortized over an average expected life of the service contract to cost of revenue, generally over three to five years. Such payments are made with the objective of increasing the number of clients, or to ensure or improve customer loyalty. Such service contract terms are established such that the supplier and other fees generated over the life of the contract will exceed the cost of the incentive consideration provided up front. Such service contracts with travel agency subscribers require that the customer commit to achieving certain economic objectives and generally have terms requiring repayment of the upfront payments if those objectives are not met.

(3)

Other, net primarily represents foreign exchange gains and losses related to the remeasurement of foreign currency denominated balances included in our consolidated balance sheets into the relevant functional currency.

(4)

Restructuring and other costs represents charges associated with business restructuring and associated changes implemented which resulted in severance benefits related to employee terminations, integration and facility opening or closing costs and other business reorganization costs.

(5)

Litigation and taxes, including penalties represents charges or settlements associated with airline antitrust litigation as well as payments or reserves taken in relation to certain retroactive hotel occupancy and excise tax disputes (see Note 13, Contingencies).

(6)

We have been paying an annual management fee to TPG Global, LLC (“TPG”) and Silver Lake Management Company, LLC (“Silver Lake”) in an amount equal to the lesser of (i) 1% of our Adjusted EBITDA, as defined by the management services agreement, and (ii) $7 million. This also includes reimbursement of certain costs incurred by TPG and Silver Lake. The management services agreement was terminated in connection with our initial public offering.

(c)	Includes capital expenditures and capitalized implementation costs as summarized below (in thousands):


	Three Months Ended March 31,
	2014		2013

Additions to property and equipment	$	51,639	$	52,701
Capitalized implementation costs		7,653		22,029

Adjusted capital expenditures	$	59,292	$	74,730