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StockTalk
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TMF Interview With Pegasus Systems President & CEO John Davis
May 24, 1999
With Yi-Hsin Chang (TMF Puck)
Dallas-based Pegasus Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PEGS)") else Response.Write("(Nasdaq: PEGS)") end if %> provides transaction processing and electronic commerce services to hotels, travel agencies, meeting and convention planners, and corporate travel departments worldwide. Its website, TravelWeb.com, allows users to make hotel and airline reservations. Pegasus Systems' customers include nine of the world's ten largest hotel companies and four of the five top U.S. travel agencies.
TMF: Frankly, I had not heard of TravelWeb.com prior to doing some research for this interview. Is this because it's a site mainly for travel agents?
Davis: No, it's not for travel agents. Travel agents can use it. It's rather unique in that they can go in and use it to make reservations. No, it's been doing consumer sales since 1994. It was built primarily for hotels. It started off in 1994 as really the first site for hotels, and those are the people that started Pegasus years and years ago.
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"We had over 2 to 2.5 million people come in last month to the site."
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We started off as an electronic catalog in 1994 that you could go in and look at pictures of what your hotel was going to look like, and what you can do is call the 800 number or call the property. In '95, we added booking capability for the hotels, and then in '96, we added airlines to it. So it's now a full travel site for consumers to come in. We had over 2 to 2.5 million people come in last month to the site.
TMF: Are you doing a lot of advertising these days to increase traffic?
Davis: Some. We're doing billboards at the top 20 airports in the United States. There are billboards coming in and out. You can't miss them. We also do a lot of online advertising.
TMF: Whom do you see as your biggest competitors, and what sets you apart from them?
Davis: We play a pretty unique role in this business. I probably need to take a step back. Originally we were created by the hotel industry to connect their reservation systems to the travel agents through systems you may be familiar with called Sabre or Galileo. When we created the site on the Internet, we basically just leveraged that same technology and allowed consumers to come in using their database to look at features of the hotel and then make a reservation, and they get back a confirmation number in about two seconds.
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"If you go into Preview [Travel] to book a hotel room, that's us, and we get a transaction fee."
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Well, other sites that are out there, like Expedia, like Preview Travel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTVL)") else Response.Write("(Nasdaq: PTVL)") end if %>, began to look at our database and our booking capability along with our relationship with other carriers, and they now use us. So if you go into Preview on AOL to book a hotel room, that's us, and we get a transaction fee. If you go into Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> Expedia, it's us.
TMF: I didn't know you were Expedia.
Davis: Yeah. We're kind of the real quiet story here. We get to sit back and make transaction fees on 80% of all of the reservations made anywhere on the Internet, anywhere in the world for hotel reservations. It's a pretty good spot.
TMF: How big is the fee you collect when someone does a transaction, say, on Expedia?
Davis: $2 is what we get paid off of that transaction. The hotel pays. It's not paid by Expedia. There are only two ways really to get into the hotels to their central reservation system. You could go through a Sabre or Galileo, which then goes through us, which then goes to the hotel; or you can choose to do business directly with us. You go directly to us, thereby saving the hotel the fees they were going to have to pay Sabre and Galileo, so the hotels really like it because typically they would have to pay Sabre $4 [per reservation].
TMF: You get $2. What would Expedia get?
Davis: What they have negotiated with the hotels. Typically it's 10% as the commission that the travel agent would receive.
TMF: Well, it's just kind of strange because from a consumer's perspective, they might see TravelWeb as a competitor to Expedia.
Davis: Sure. We sit in a very unique position. We have our own retail site, so we're able to go out and do some special offerings on behalf of the hoteliers. You can go in for example and look at Click-It! Weekends, which is unique to TravelWeb and has super rates for the upcoming weekend all around the world. It's great. So we're able to do some specials with the hotels, and at the same time, we created one database that everybody goes to, which eliminates the need for the hoteliers to update the database for Preview or Expedia or CNN or any of the rest of them.
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"We get to sit back and make transaction fees on 80% of all of the reservations made anywhere on the Internet, anywhere in the world for hotel reservations."
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With them all coming into one system, all the hotels have to do is update our database, and then the information is passed on to everybody else. So it's a much easier process for the hotel industry. For the consumers, they don't know the difference. We're just giving each site the images. Each company or site can do their own templates or do their own presentation in the form they want it to be in, so you'd have absolutely no idea you're going through us except at the bottom of the page it may say "Powered by Pegasus."
TMF: Are you concerned that someone like Microsoft could set up their own system and not use yours any more and basically cut into your business?
Davis: No, I don't know that they could set it up on their own. We have a switch we built 10 years ago, and the only way to get to the hotel industry is either through the Sabre, Galileo, or WorldSpan systems and then through us, or through us [directly]. The hoteliers have no interest in going one-on-one with a database at every different site. That just doesn't make sense. You can't guarantee response times, you can't guarantee the continuity of the product or the standardization, so they have no interest in doing that. In fact, quite frankly, Microsoft started off going through a travel agent system called WorldSpan that's based out of Atlanta. After looking at the features and benefits that we offer, they moved their hotel business from WorldSpan over to us.
TMF: With your technology already in place do you plan to diversify beyond the travel industry?
Davis: No, we're staying in the travel industry and quite frankly specifically in the hotel industry. How we're diversifying is in the number of reservations that we process. We started off connecting travel agents to the hotel reservation systems. Only about 20% of all the reservations made in the world today are made by travel agents, so close to 80% of all the reservations that a hotel receives are from the guests themselves over the phone or by fax.
So our real opportunity is to provide e-commerce tools to a variety of different people who book hotel rooms, such as corporate travelers. There's a lot of software that's being installed in corporations that allow employees to make their own reservations but forces them to comply with travel policies. That software is linked to us, so we are now going to be able to pick up new reservations there.
Meetings and conventions is a huge business. There are 75 million Net reservations. We have now worked out an agreement with a company called Passkey.com, under which we will supply meeting planners at convention investors bureaus -- each city has one -- with software that will allow them to make reservations electronically directly through Pegasus instead of having to fax rooming lists every night. So again we get paid a transaction fee for that.
And honestly on the consumer side -- the biggest group of all -- they can come through TravelWeb.com, or they can come through Expedia or Preview or anywhere else and again come through and pay a transaction fee. So if you look at the company we've built, we're only cutting about 8% of all of the reservations going to our existing customers. So we really don't need new customers; we need to figure out new ways of providing e-commerce tools to those individuals or those groups that want to book reservations.
TMF: Because Expedia uses your system, there's really no point in comparison shopping, or is there?
Davis: No. The rates that you would find when you go in are all supplied by the hotel companies, so if you come through Pegasus, basically -- let's say, for example, you wanted to see what the rate was at a Sheraton. You're really in Sheraton's central reservations. You're actually looking at the same screens that if you picked up the phone and called 1-800-Sheraton, you're looking at the same screen that lady is. So, no, there's no difference.
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"Since going public in the summer of 1997, we've enjoyed seven quarters in a row of record profit and record revenue."
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It's up to Sheraton to decide which rate they want to allow you to have access to, whether they want you to have access to a super corporate deal is up to them, and they make those decisions as you come in. We tell them where the booking is coming from, so for example if you were an employee for a company like Siemens, we would tell Sheraton it's a Siemens employee, and they would return the Siemens rate.
If you were a consumer coming off of one of the Internet sites, we'll say coming off the Internet off of Preview, then they make the decision of what kind of rate. They may have some kind of special rate for Internet bookers because they want to bring them in and have them book electronically that way rather than pick up the phone because the phone reservation costs anywhere from $8 to $12 to hotel companies. They can save that by having you book electronically. Many of them more than willingly start to pass the savings back to the consumers.
TMF: So there could be slight differences in say Expedia or Preview or TravelWeb because they could be having a special deal with a certain hotel.
Davis: Exactly, or the hotels are cutting into their rates pretty rapidly, though not as fast as airlines. If you call up any airline at any moment and call back in 10 minutes, I guarantee you're not going to get the same reading at all. Hotels don't change rates nearly that much, but they do change in terms of what kind of demand they're having during the day for specific days, so they may change the rates up and down just like they would if you picked up the phone. There's no difference.
TMF: How much of your business comes from outside the U.S.? How much of your growth potential lies overseas?
Davis: About 20% of our revenue comes from outside the U.S. Internet-wise, it's about 30% to 34% on our Internet bookings coming through. And again in the unique position we are in, we get to see where the reservations are coming from for all of the sites. So we get to see what kind of growth we are seeing internationally on the Internet, and that's substantial and growing very rapidly.
TMF: What do you see as the biggest threat to your business?
Davis: A general major downturn in the economy that would reduce corporate travel significantly.
TMF: Do you see corporate travel as a bigger part of your business than leisure travel?
Davis: Yes, as of right now, yes. We're getting into the consumer market obviously with the access to the Internet, and the booking capability for travel that now exists is growing, but still corporate bookings are significant. If you look at the typical hotel chain in the last year, less than 1% of their reservations came from the Internet, while clearly 20% are coming from travel agents, and most of the travel agents' business is corporate-driven.
TMF: In February, you launched this new corporate identity strategy. Can you tell us how that's progressing?
Davis: It's worked out very well. Our chief problem is probably me remembering not to say the old name. But it has already helped tremendously in focusing a number of different products and services that we've been providing to the travel industry for years under various names to one called "Pegasus," which has helped a lot because all of a sudden everybody gets over the worry of "I wonder what the name of this product is. I wonder who owns it. I wonder who do I call." With everything named "Pegasus," it certainly has helped a lot.
TMF: Is there anything else you'd like to add about the company?
Davis: Since going public in the summer of 1997, we've enjoyed seven quarters in a row of record profit and record revenue. The company is rolling along, doing very, very well. We play a very significant role on the Internet, obviously in terms of where the bookings come from and who's doing what. And finally the second half of our business is the commission business. We settle commissions from hotels to travel agents, and the biggest agencies that are growing in that market again are Expedia and Preview, so we now collect their commissions for them. So we kind of have our hand in the transactions in a number of different places anywhere in the world for hotel reservations.
TMF: Well, thank you so much for talking to us today. I learned a great deal.
Davis: Thanks for taking interest.
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