Sabre Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Sabre provides technology to the global travel industry through Travel Network and Airline and Hospitality Solutions. Results include the Trust Group, acquired in January 2016; Abacus has been consolidated since July 2015.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $859.5 million | $710.3 million | +21% |
| Operating income | $171.4 million | $119.0 million | +44% |
| Operating margin | 19.9% | 16.7% | +3.2 percentage points |
| Continuing-operations income | $92.9 million | $49.3 million | +88% |
| Continuing-operations diluted EPS | $0.33 | $0.18 | +$0.15 |
| Net income attributable to common stockholders | $105.2 million | $207.5 million | −49% |
| Cash provided by operating activities | $140.2 million | $131.8 million | +6% |
| Free cash flow (non-GAAP) | $64.7 million | $69.9 million | −7% |
| Adjusted EBITDA (non-GAAP) | $287.5 million | $243.6 million | +18% |
| Adjusted EBITDA margin | 33.4% | 34.3% | −0.9 percentage points |
Revenue growth reflected higher Travel Network bookings and Airline and Hospitality Solutions activity, as well as the acquisitions. Travel Network revenue rose 23% to $625.5 million; Airline and Hospitality Solutions revenue rose 16% to $238.4 million. Total Direct Billable Bookings increased 27.9% to 134.9 million, including 31.1% growth in air bookings; excluding Abacus, bookings grew 5%. Airline Solutions Passengers Boarded rose 45.3% to 183.4 million, driven in part by the American Airlines Group cutover. Continuing-operations results improved, while reported net income fell because Q1 2015 included substantial gains from the Travelocity and lastminute.com divestitures.
Cost of revenue increased 18% to $554.3 million and SG&A increased 9% to $133.9 million. Interest expense declined 11% to $41.2 million. Joint-venture equity income fell to $0.8 million from $8.5 million, largely because Abacus was acquired in 2015. Other income included a $6 million earn-out receipt related to a prior business sale. The Q1 2016 effective tax rate was 31%, versus 36%.
Cash, debt and liquidity
- Cash and cash equivalents were $111.7 million at March 31, down from $321.1 million at year-end. The quarter’s $209.4 million decrease included $158.7 million of acquisition spending, $75.5 million of property and equipment additions, $36.0 million of dividends, and debt repayment and other cash uses.
- Total debt carrying value was approximately $3.29 billion, compared with $3.36 billion at December 31. Debt face value was $3.32 billion. Cash less carrying-value debt implies net debt of about $3.18 billion.
- The $165 million senior unsecured notes matured and were repaid in March, using cash and revolving-credit borrowings. Revolver borrowings were $100 million; reported availability was $277.5 million after letters of credit and other reductions.
- Current liabilities were $1.17 billion versus current assets of $661.4 million. The balance sheet included a $111.2 million current Tax Receivable Agreement liability.
- Management said cash, operating cash flow and revolver availability were adequate for operating and capital needs over the next 12 months. It expected to fund the $81 million mortgage maturity due April 1, 2017 and $111 million of estimated TRA payments due in Q1 2017 through cash, revolver usage or debt offerings.
Capital expenditures were $75.5 million; capitalized implementation costs were another $20.0 million. Sabre paid a quarterly dividend of $0.13 per share, up from $0.09 a year earlier. Future dividends remain subject to board approval and debt restrictions.
Material changes, outlook and notable items
- Acquisitions: Trust Group was acquired for $159 million net cash consideration and added hotel reservation and revenue-management capabilities in EMEA and APAC. Its purchase-price allocation was preliminary. Abacus integration restructuring was expected to be substantially complete by Q4 2016, with no significant additional charges then expected.
- Accounting adoption: Early adoption of ASU 2016-09 increased retained earnings by a net cumulative $87 million at January 1, 2016 ($89 million for excess tax benefits, partly offset by $2 million for forfeitures). Q1 results included $10 million of excess tax benefits reducing the tax provision.
- Tax and TRA: A $17 million tax benefit arose from resolution of uncertain tax positions related to discontinued Travelocity operations. Estimated future TRA payments total $387 million, subject to actual utilization of pre-IPO tax assets and future taxable income.
- Venezuela: $16 million of receivables remained outstanding, with revenue recognition deferred until cash collection; $2 million was collected during the quarter.
- Guidance: The filing provides no specific full-year 2016 revenue or earnings guidance. Management reported no material change in previously disclosed business trends.
- Litigation and contingencies: The US Airways antitrust trial was scheduled for October 2016. Sabre recorded no loss accrual, considers the claims not probable, and warned that adverse damages could be trebled and materially affect results. The DOJ antitrust investigation remained open, with no recent communications reported. Potential Indian tax exposure was approximately $41 million if the authorities prevailed on all claims; Sabre recorded no liability because it did not consider an adverse outcome probable.
- Other risks: Results remain sensitive to global travel volumes, supplier and buyer contract renewals, pricing and incentive pressure, direct distribution competition, customer concentration, cyber and system outages, third-party technology providers, foreign exchange, floating interest rates, and substantial indebtedness. Sabre also disclosed an ERP consolidation project underway in 2016.
Most important facts for investors to verify
- How much reported growth reflects acquired businesses versus organic bookings and product growth, particularly Abacus and Trust Group.
- Whether booking and passenger growth translates into sustained margins, given the decline in Adjusted EBITDA margin and higher incentive, personnel and integration costs.
- Cash conversion and funding needs, including the $81 million mortgage maturity, the $111 million expected TRA payment, capital spending and dividends.
- Debt levels, variable-rate exposure, revolver availability and compliance with leverage-related covenants.
- Developments in US Airways litigation, the DOJ investigation, Indian tax disputes and other legal or tax contingencies.
- Collection of Venezuela receivables and the effects of currency controls, along with the final Trust Group and Abacus purchase-price allocations.
- Non-GAAP measure definitions and reconciliations; these measures exclude items such as stock compensation, acquired-asset amortization, interest or working-capital effects and are not substitutes for GAAP results.