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 two reportable segments: (i) Travel Network and (ii) Airline and Hospitality Solutions, which 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 software-as-a-service (“SaaS”) based and hosted applications and platforms to market to the travel industry.

In January 2016 and April 2016, we completed the acquisitions of the Trust Group and Airpas Aviation, respectively, which are integrated and managed as part of our Airline and Hospitality Solutions segment.

Our CODM utilizes Adjusted Gross Profit and Adjusted EBITDA as the measures of profitability to evaluate performance of our segments and allocate resources. Corporate includes a technology organization that provides development and support activities to our segments. The majority of costs associated with our technology organization are allocated to the segments primarily based on the segments' usage of resources. Benefit expenses, facility costs and depreciation expense on the corporate headquarters building are allocated to the segments based on headcount. Unallocated corporate costs include certain shared expenses such as accounting, human resources, legal, corporate systems, and other shared technology costs, as well as all amortization of intangible assets and any related impairments that originate from purchase accounting, stock-based compensation, restructuring charges, legal reserves, 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 fees charged by Travel Network to Airline and Hospitality Solutions for airline trips booked through our GDS.

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. Our CODM uses Adjusted Capital Expenditures in making product investment decisions and determining development resource requirements.

The performance of our segments is evaluated primarily on Adjusted Gross Profit and Adjusted EBITDA which are not recognized terms under GAAP. Our uses of Adjusted Gross Profit 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 Gross Profit as operating income (loss) adjusted for selling, general and administrative expenses, impairment, amortization of upfront incentive consideration, and the cost of revenue portion of depreciation and amortization, restructuring and other costs, litigation costs, and stock-based compensation included in cost of revenue.

We define Adjusted EBITDA as income (loss) from continuing operations adjusted for depreciation and amortization of property and equipment, amortization of capitalized implementation costs, acquisition-related amortization, amortization of upfront incentive consideration, interest expense, net, other, net, restructuring and other costs, acquisition-related costs, litigation costs (reimbursements), net, stock-based compensation, and income taxes.

We define Adjusted Capital Expenditures as additions to property and equipment and capitalized implementation costs during the periods presented.

Segment information for the three months ended March 31, 2017 and 2016 is as follows (in thousands):



	Three Months Ended March 31,
	2017			2016
Revenue
Travel Network	$	663,477		$	625,476
Airline and Hospitality Solutions	257,976			238,380
Eliminations	(6,100		)	(4,313		)
Total revenue	$	915,353		$	859,543

Adjusted Gross Profit ^(a)
Travel Network	$	319,018		$	304,914
Airline and Hospitality Solutions	105,348			100,876
Corporate	(23,589		)	(17,594		)
Total	$	400,777		$	388,196

Adjusted EBITDA ^(b)
Travel Network	$	290,222		$	273,174
Airline and Hospitality Solutions	85,517			82,938
Total segments	375,739			356,112
Corporate	(78,178		)	(68,632		)
Total	$	297,561		$	287,480

Depreciation and amortization
Travel Network	$	20,468		$	18,530
Airline and Hospitality Solutions	38,777			35,793
Total segments	59,245			54,323
Corporate	46,425			41,960
Total	$	105,670		$	96,283

Adjusted Capital Expenditures ^(c)
Travel Network	$	26,273		$	22,970
Airline and Hospitality Solutions	62,162			60,420
Total segments	88,435			83,390
Corporate	16,979			12,039
Total	$	105,414		$	95,429

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(a)	The following table sets forth the reconciliation of Adjusted Gross Profit to operating income in our statement of operations (in thousands):



	Three Months Ended March 31,
	2017		2016
Adjusted Gross Profit	$	400,777	$	388,196
Less adjustments:
Selling, general and administrative	144,441		133,856
Cost of revenue adjustments:
Depreciation and amortization ⁽¹⁾	73,697		66,507
Amortization of upfront incentive consideration ⁽²⁾	16,132		12,337
Stock-based compensation	3,181		4,074
Operating income	$	163,326	$	171,422


(b)	The following table sets forth the reconciliation of Adjusted EBITDA to income from continuing operations in our statement of operations (in thousands):



	Three Months Ended March 31,
	2017		2016
Adjusted EBITDA	$	297,561	$	287,480
Less adjustments:
Depreciation and amortization of property and equipment ^(1a)	61,300		53,665
Amortization of capitalized implementation costs ^(1b)	9,189		8,488
Acquisition-related amortization ^(1c)	35,181		34,130
Amortization of upfront incentive consideration ⁽²⁾	16,132		12,337
Interest expense, net	39,561		41,202
Other, net ⁽³⁾	15,234		(3,360		)
Restructuring and other costs ⁽⁴⁾	—		124
Acquisition-related costs ⁽⁵⁾	—		108
Litigation costs, net ⁽⁶⁾	3,501		(3,846		)
Stock-based compensation	8,034		10,289
Provision for income taxes	31,707		41,424
Income from continuing operations	$	77,722	$	92,919

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(1)	Depreciation and amortization expenses:


a.	Depreciation and amortization of property and equipment includes software developed for internal use.


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


c.	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 the inception or modification of a service contract, which are capitalized and amortized over an average expected life of the service contract, generally over three years to five years. Such consideration is 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 incentive consideration if those objectives are not met.

(3)

In the first quarter of 2017, we recognized a $12 million loss related to debt modification costs associated with our debt refinancing. In the first quarter of 2016, we recognized a gain of $6 million associated with the receipt of an earn-out payment from the sale of a business in 2013. In addition, other, net includes 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 represent 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)	Acquisition-related costs represent fees and expenses incurred associated with the acquisition of the Trust Group and Airpas Aviation (see Note 2, Acquisitions).


(6)	Litigation costs, net represent charges and legal fee reimbursements associated with antitrust litigation (see Note 10, Contingencies).


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



	Three Months Ended March 31,
	2017		2016
Additions to property and equipment	$	88,318	$	75,472
Capitalized implementation costs	17,096		19,957
Adjusted Capital Expenditures	$	105,414	$	95,429