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Amadeus, the world’s largest enterprise travel technology company, has long invested in research and development. But a glance at its third quarter earnings shows the company doubling down on that effort.
The Madrid-based company spent $254.7 million, or €221.8 million, on research and development during the quarter ended September 30. That was a 20.6 percent jump, year-over-year.
The rise in tech investment didn’t hit the company’s profitability too hard. The company’s profit for the period was $299 million, or €261.2 million — up 6 percent from a year ago.
In the third-quarter, Amadeus generated revenue of $1.38 billion, or €1.206 billion, up 5.5 percent from the same period a year earlier.
Research and development investment amounted to 18.4 percent of revenue.
Amadeus’s research and development spending was also relatively high for tech companies generally. As a rough benchmark, Amazon, Microsoft, and Salesforce have averaged between 10 and 14 percent of total revenue for annual research and development expenditures recently.
During a call with investors on Wednesday, Amadeus’s management noted that the research and development spending was within the guidance they provided as a forecast for the year.
A hiring spree is one related cost. Between January and September, Amadeus boosted its headcount of full-time permanent staff and contractors, primarily software engineers, by 7 percent.
Executives said their hiring was primarily for research and development projects. One note: The company’s headcount growth doesn’t reflect its acquisition of TravelClick, a hotel technology company. That acquisition didn’t close until October.
The tech expenditure suggested big things on the horizon. The company spent most of its research and development investment on product development, though it also spent some on customer implementation, such as on a project to begin to move Air Canada onto Amadeus’s reservation system.
Amadeus’s most high-profile airline distribution project is a new platform to combine airfare and ancillary content from various sources rather than use its existing technology to distribute content. Amadeus is also developing retailing tools for airlines and solutions related to revenue optimization.
For hotels, it is working on a new property management system for Premier Inn and other companies.
For travel agencies and online metasearch engines, Amadeus continues to build a next-generation selling platform. For corporations, it is investing in a corporate travel booking tool and in travel expense management tools.
It remains to be seen if Amadeus’s broad research pipeline — relative to peers who have pruned their own pipelines to focus on a few key projects — means that the company is spreading its bets too thinly in a way that might hurt its future profits. An alternative view is that, by betting on several opportunities, the company is increasing the odds of it will develop a breakout hit that juices its future profits.
This summer, Amadeus began a project on creating new technologies and business practices with American Airlines and several key players in corporate travel — American Express Global Business Travel, BCD Travel, Carlson Wagonlit Travel, and Flight Centre Travel Group.
To bring together all the so-called new distribution capability (NDC) efforts across Amadeus, it has created the so-called Amadeus NDC-X program. The effort unifies the company’s work as an IT provider and as a content distributor, including of air, hotel, and other travel content, and it reflects an investment in being able to handle content from any source, such as from the new technological processes some airlines have been championing lately.
In a recent interview, Gianni Pisanello, vice president of NDC-X at Amadeus, said that 2019 would be an investment year for product development and that 2020 would be a year when many content and services would be put into production and used by initial partners at scale.
“If airlines were to start online distribution from scratch today, they would never design their system the way they have as a hotchpotch over decades,” said Pisanello, in the interview.
He argued, in remarks echoed by management’s comments to investors Wednesday, that Amadeus’s biggest research and development bet is “to figure out how to help airlines jump into the modern technological era with a minimum of disruption and at a minimum possible cost.”
Fending Off Airline Bypasses
Many airlines have attempted to reduce the role that middlemen technology companies like Amadeus play in the distribution of their content.
The direct connect efforts have generated “disappointing” results so far, according to Skift Research’s report this month on The State of Airline Distribution.
Two key reasons the report cited:
- The distribution systems [like Amadeus], in many cases, have entrenched themselves within travel management companies by effectively acting as their back-end software providers and a main source of revenue. There is no easy replacement for these travel management companies, and most airlines cannot forgo the high-value bookings that these travel management businesses provide.
- Airline distribution costs have been falling over time, changing the risk/reward equation for any airline considering ripping up the old pipes.
On a call with investors Wednesday, CEO Luis Maroto said he believed that the disintermediation efforts had not dented the company’s overall performance.
In the past year, Air France-KLM said it would copy the moves of Lufthansa and International Airlines Group (IAG), parent of British Airways, and add a surcharge on sales made through third-party distribution channels like Amadeus and its rivals Sabre and Travelport.
Amadeus, like its peer companies, have responded by negotiating deals via so-called private channels with Air France-KLM and IAG that offer a compromise. The commercial details of these deals are unknown, though Amadeus still counts bookings through these private channels in its total bookings as a global distribution system even though they fall outside of the company’s traditional fee structure for servicing such transactions.
Amadeus noted that, given the diversity of its business services, it has not seen a dramatic revenue hit due to the surcharges.
Because airlines often use Amadeus’s information technology systems to run their operations, and because these systems see increased activity when they handle more direct bookings, Amadeus benefits from some of the shift from indirect to direct channels.
Because airlines’s direct booking marketing campaigns also point consumers to book through price-comparison travel search sites like Google and Kayak, and because Amadeus supplies shopping and data management tools to those companies, Amadeus also benefits partly from the shift to direct.
Amadeus Chief Financial Officer Ana de Pro said she is looking into how to help investors understand these shifts in where airline distribution revenue flows into the company’s various units.
De pro expected to introduce new guidance by 2020 in how revenue generated by distribution will be recognized on the company’s balance sheets. While she didn’t say this, the presumable explanation for the delay is that the additional time will enable the company to haggle over new commercial terms for the new business models with airlines.
Overall, De Pro said her company’s capital expenditure today will bring benefits tomorrow.
Amadeus spent a greater amount on research and development on an annual basis in the past year in absolute dollars than in any year since it debuted on the public market in 2010, according to a review of financial filings.
De Pro predicted similar levels of investment in the next two years.
Correction: This article was corrected on November 13. It originally said Amadeus’s R&D as a percentage of revenue was several percentage points higher than the comparable figures for its closest rivals. But the three companies, Amadeus, Sabre, and Travelport, do not break out what percentage of their R&D spend is related to their distribution units specifically. If the information were disclosed, another company might be ahead of Amadeus.