Sabre Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Sabre provides technology and services to the travel industry through Travel Network and Airline and Hospitality Solutions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $839.0M | $785.0M | $2,543.8M | $2,202.4M |
| Operating income | $90.2M | $108.8M | $403.6M | $350.4M |
| Operating margin | 10.7% | 13.9% | 15.9% | 15.9% |
| Income from continuing operations | $42.3M | $123.1M | $210.4M | $205.0M |
| Net income attributable to common stockholders | $40.8M | $176.3M | $218.0M | $416.0M |
| Adjusted EBITDA | $237.9M | $241.7M | $796.8M | $712.8M |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $432.5M | $389.7M |
| Free cash flow | Not stated for quarter | Not stated for quarter | $178.3M | $186.6M |
- Q3 revenue rose 7%; Travel Network revenue grew 2% and Airline and Hospitality Solutions grew 20%. Nine-month revenue rose 15%, including the impact of the Abacus acquisition.
- Q3 GAAP earnings fell sharply year over year, while adjusted EBITDA was nearly flat. The comparison is affected by $98M of Abacus-related gains in Q3 2015 and discontinued-operation income in 2015, including gains on Travelocity and lastminute.com sales. Nine-month continuing-operations income was slightly higher despite lower reported net income.
- Q3 cost of revenue increased 16%, faster than revenue, reflecting incentive costs, transaction volumes, corporate technology costs and higher depreciation and amortization. Nine-month operating margin was unchanged at 15.9%.
- Travel Network direct billable bookings increased 2% in Q3 and 17% over nine months; the nine-month increase included Abacus, while growth excluding Abacus was 3%. Airline Solutions passengers boarded rose 45% in both comparisons, primarily following the American Airlines Group system cutover and growth among existing customers.
- Nine-month capital expenditures were $254.2M; capitalized implementation costs were $64.6M. Free cash flow, defined by Sabre as operating cash flow less property and equipment additions, declined to $178.3M from $186.6M.
Balance sheet and liquidity
- Cash was $272.0M at September 30, down from $321.1M at December 31, 2015. Current assets were $882.7M and current liabilities $1,036.1M.
- Debt carrying value was approximately $3.429B; face value was $3.465B. The $400M revolver had no borrowings; reported availability after letters of credit was $364.0M. Letters of credit totaled $36.0M.
- Management stated that operating cash flow, cash on hand and the revolver should provide adequate liquidity for operations, capital expenditures and obligations over the next 12 months. It expects to refinance or otherwise fund the $80M mortgage maturity in April 2017.
- Sabre expects to pay approximately $101M, including interest, under its Tax Receivable Agreement in Q1 2017. The balance sheet included $100.3M of current TRA liability and $288M of noncurrent liability.
- Quarterly dividend was $0.13 per share. Nine-month dividends paid totaled $108.4M.
Material changes, outlook and risks
- In January 2016, Sabre acquired hotel technology provider Trust Group for approximately $156M net cash consideration; Airpas Aviation was acquired in April for approximately $9M. Both are managed in Airline and Hospitality Solutions.
- In July, Sabre refinanced and amended credit facilities, adding a $600M Term Loan A and replacing its revolver with a $400M facility. The Term Loan A and new revolver mature in 2021, but have an accelerated November 2018 maturity condition tied to repayment or refinancing of specified term loans. Total net leverage must remain below 4.5-to-1 under the amended agreement.
- No specific revenue or earnings guidance is provided in this filing. Management noted expected higher stock-based compensation as annual equity grants replace biennial grants, and cited shared technology costs and transition costs under its HPE services arrangement.
- Major risks include dependence on global travel volumes and airline relationships, supplier pricing pressure and direct-distribution alternatives, customer concentration, system reliability and cybersecurity, third-party technology-provider dependence, foreign-exchange and floating-rate debt exposure, and substantial indebtedness.
- US Airways antitrust claims proceeded to trial in October 2016, with trial expected to conclude in December. Sabre recorded no loss accrual; plaintiffs seek $45M or $73M in damages before potential trebling. The DOJ investigation remained open, with no recent communication reported. The consumer class action retained a federal injunctive claim after dismissal of state-law damages claims.
- Other contingencies include Indian tax litigation, with potential taxes, interest and penalties estimated at approximately $42M if authorities prevailed; hotel-tax matters related to Travelocity; and an insurance-reimbursement dispute. Sabre reported no material hotel-tax reserve.
- Venezuelan customer receivables totaled $20M, with revenue recognition deferred until cash collection; $4M was collected during the nine months. CEO Tom Klein intended to resign at year-end 2016; the board had begun a successor search.
- Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting. A global ERP consolidation project was underway.
Investor verification priorities
- Separate underlying operating performance from acquisition impacts and the unusual 2015 Abacus and discontinued-operation gains; assess GAAP and adjusted results together.
- Track Travel Network bookings, incentive consideration and margins, and Airline and Hospitality Solutions growth excluding acquisitions and customer cutover effects.
- Assess free cash flow after elevated capital investment, cash conversion, and the funding plan for the 2017 mortgage and TRA payments.
- Review debt maturities, floating-rate exposure, leverage covenant headroom and the accelerated 2018 maturity condition.
- Monitor the US Airways trial, DOJ investigation, other legal and tax contingencies, and collection of Venezuelan receivables.