Sabre Corporation — Q1 2014 Form 10-Q
Business context and reporting period
Sabre provides technology and distribution services to the travel industry through Travel Network, Airline and Hospitality Solutions, and Travelocity. This unaudited report covers the three months ended March 31, 2014, compared with Q1 2013. Sabre’s IPO closed after quarter-end, on April 23, 2014; post-IPO transactions are not reflected in the March 31 balance sheet.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $755.4 | $759.3 | Down 0.5% |
| Operating income | $66.8 | $77.7 | Down 14.1% |
| Operating margin | 8.8% | 10.2% | Down 1.4 percentage points |
| Net loss attributable to Sabre | $(2.8) | $(15.8) | Improved |
| Net loss attributable to common shareholders | $(12.0) | $(24.7) | Improved |
| Basic and diluted loss per share | $(0.07) | $(0.14) | Improved |
| Cash from operating activities | $72.2 | $92.4 | Down 21.9% |
| Capital expenditures, including capitalized implementation costs | $59.3 | $74.7 | Down 20.7% |
| Free cash flow, company-defined | $20.6 | $39.7 | Down |
| Adjusted EBITDA, company-defined | $183.7 | $192.5 | Down 4.6% |
Cash and cash equivalents were $286.4 million at March 31, 2014, versus $308.2 million at December 31, 2013. Current assets of $901.9 million were below current liabilities of $1,181.6 million, a working-capital deficit of approximately $279.6 million. Total debt at face value was $3,729.4 million; the revolver was undrawn, with $338.2 million available after letters of credit and other reductions. Stockholders’ deficit was $956.2 million; $643.3 million of redeemable preferred stock was presented as temporary equity.
Material changes versus the prior comparable period
- Travel Network revenue rose 3% to $491.7 million; direct billable bookings increased 4.4% to 102.6 million, while average booking fees declined 1%.
- Airline and Hospitality Solutions revenue increased 9% to $176.7 million; passengers boarded grew 9.4% to 117.6 million.
- Travelocity revenue fell 33% to $96.1 million, primarily reflecting migration to Expedia’s marketing-fee model and the sale of TPN and TBiz. Travelocity Adjusted EBITDA worsened to a loss of $25.2 million from a loss of $8.9 million.
- Operating income declined despite lower SG&A, as cost of revenue rose 2% and depreciation and amortization increased 16%. Interest expense fell 23% to $63.9 million, helped by lower debt-modification costs and February debt repricing.
- Net loss from discontinued operations narrowed to $1.1 million from $11.0 million, largely reflecting the prior-year Zuji sale loss.
Outlook, management commentary, risks and unusual items
- Travelocity and Expedia: Most U.S. and Canadian air and hotel offerings had migrated to Expedia by March 31; the remainder was expected to launch in Q2 2014, with full implementation expected by year-end. Management expected Travelocity revenue to settle at 55%–65% of 2013 levels and costs at 45%–55% after implementation, with improved margins, but cautioned success was uncertain. Approximately $11 million of additional 2014 restructuring charges were estimated.
- Debt and IPO: The April IPO generated $677 million net proceeds. Sabre used proceeds to repay $296 million of Term Loan C and redeem $320 million of 2019 notes at a premium, and paid accrued interest and a $21 million management fee. All Series A preferred stock was exchanged for 40.3 million common shares. These subsequent events materially changed capitalization after quarter-end.
- Tax receivable agreement: Sabre expected to record a $310–$350 million liability for the TRA after considering a valuation allowance. Management estimated future payments could total $330–$380 million over six years, subject to taxable income and realization of tax assets; material payments were not expected before 2016.
- Venezuela: Currency controls, devaluation and weaker local travel demand delayed collections and reduced revenue recognition. Sabre had $5 million of receivables outstanding at quarter-end to be recognized as revenue when collected and expected 2014 Venezuelan revenue to decline from 2013.
- Litigation and contingencies: The US Airways antitrust case remained active; US Airways asserted damages of $281 million or $425 million before potential trebling, amounts Sabre disputed. A DOJ investigation was ongoing. Hotel occupancy and tax disputes included a $19 million reserve for identified issues; the filing also disclosed a $6 million reserve for certain hotel-tax cases. VAT receivables, net of reserves, were $25 million, with collection and audit risk. An Indian tax dispute could involve approximately $27 million if authorities prevailed, but Sabre said the outcome was not probable and recorded no liability.
- Other notable items: The quarter included a $3.0 million loss on debt extinguishment and $2.4 million of net loss from discontinued operations. The effective tax rate was 170%, reflecting losses for which no tax benefit could be recognized and other discrete items. Adjusted EBITDA and adjusted free cash flow are non-GAAP measures; adjusted free cash flow was $68.0 million versus $49.1 million, including company-defined adjustments such as Travelocity working capital.
- Management stated that cash, operating cash flows and revolver availability were expected to cover operating and capital needs over the next twelve months, while noting future debt refinancing or additional financing might be needed. Sabre reported compliance with debt covenants at March 31.
Important facts for investors to verify
- Post-IPO debt balances, interest burden and liquidity after the Term Loan C prepayment and 2019 note redemption.
- Whether the Expedia migration achieves the projected Travelocity cost reductions, revenue levels and profitability, and whether the estimated restructuring costs prove accurate.
- Cash conversion and working-capital trends, particularly the decline in operating cash flow and the company-defined adjustments to adjusted free cash flow.
- Progress and potential exposure from antitrust proceedings, hotel-tax disputes, VAT collection and the Indian tax litigation.
- The ultimate TRA liability and cash-payment schedule, including the assumptions about utilization of pre-IPO tax assets.