Sabre Corporation — 2019 Form 10-K Summary
Business context and reporting period
Sabre provides technology and services to the travel industry through Travel Network, a global travel marketplace; Airline Solutions, airline software; and Hospitality Solutions, hotel software. This annual report covers the fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; it is not a standalone quarterly filing. Amounts below are in U.S. dollars.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $3.975 billion | $3.867 billion | +2.8% |
| Operating income | $363 million | $562 million | -35.3% |
| Operating margin | 9.1% | 14.5% | -5.4 percentage points |
| Income from continuing operations | $164 million | $341 million | -51.8% |
| Net income attributable to common stockholders | $159 million | $338 million | -53.0% |
| Diluted EPS | $0.57 | $1.22 | Down $0.65 |
| Adjusted EBITDA (non-GAAP) | $946 million | $1.124 billion | -15.8% |
| Cash from operating activities | $581 million | $725 million | -19.8% |
| Free cash flow (non-GAAP) | $466 million | $441 million | +5.7% |
Revenue increased across all three segments: Travel Network rose 3% to $2.883 billion, Airline Solutions rose 2% to $840 million, and Hospitality Solutions rose 7% to $293 million. However, adjusted operating income fell in each segment: Travel Network to $649 million from $756 million; Airline Solutions to $80 million from $111 million; and Hospitality Solutions recorded a $22 million loss versus $13 million income.
Travel Network direct billable bookings grew 1.4% to 566 million. Airline Solutions passengers boarded declined 1.5% to 741 million. Hospitality Solutions central reservation transactions increased 22.4% to 108 million, including Wyndham brand migrations. The filing describes fourth-quarter travel bookings and revenue as seasonally weaker, particularly in December. In Q4 2019, revenue was $941 million versus $924 million a year earlier; operating income was $58 million versus $121 million, and net income attributable to common stockholders was $10 million versus $84 million.
Liquidity, debt, and capital allocation
At December 31, 2019, cash and cash equivalents were $436 million, total debt was approximately $3.34 billion, and reported long-term debt was $3.26 billion. The $400 million revolving facility had no borrowings outstanding; availability was approximately $388 million after letters of credit. Approximate net debt, using total debt less cash, was $2.91 billion. Working capital surplus was $96 million, down from $169 million.
Operating cash flow decreased to $581 million. Capital expenditures were $115 million, down from $284 million; management attributed much of the lower capitalization of development costs to the shift to agile methods and technology transformation. Free cash flow rose despite lower operating cash flow, reflecting the substantially lower capital spending. Sabre paid $154 million in dividends and repurchased $78 million of shares during 2019. The board declared a $0.14-per-share dividend payable in March 2020.
Material changes, outlook, and risks
- Operating expenses pressured profitability: cost of revenue rose 9% to $3.035 billion, while SG&A increased 12% to $577 million. Technology strategy changes shifted more spending to operating expense: total technology expenditures were $1.034 billion, including $945 million expensed and $89 million capitalized, compared with $744 million expensed and $256 million capitalized in 2018.
- Management expected approximately $150 million of incremental technology transformation investment in 2020 and continued investment over the following years. It forecast 2020 capital expenditures of $80 million to $120 million and expects the transformation to be completed in 2024, with anticipated lower cloud infrastructure costs and higher margins. These are expectations, not assurances.
- In February 2020, management said COVID-19 was materially affecting travel, especially air travel to and from Asia, and expected a material impact on first-quarter 2020 results. It could not reasonably estimate the full-year 2020 financial impact but expected it to be material.
- Other headwinds included Jet Airways’ insolvency, the 737 MAX impact on one carrier, certain airline customers’ transitions away from Sabre, European carrier content shifts, and travel agency incentive costs. Management expected some of these pressures to continue into 2020.
- Sabre acquired Radixx for approximately $110 million in October 2019. The proposed $360 million Farelogix acquisition remained subject to U.S. and U.K. regulatory challenges; the DOJ trial concluded in February 2020 without a decision as of the filing. Sabre had advanced $20 million of Farelogix legal fees and could owe up to an additional $25 million in advances or termination fees, depending on circumstances.
- Antitrust exposure includes the remanded US Airways litigation, for which Sabre reversed a $32 million accrual in 2019 and had no loss accrued at year-end; a DOJ investigation; and an EC investigation. Potential outcomes and losses were not clearly estimable in the filing. An Indian tax dispute could result in approximately $45 million of taxes, interest, and penalties if authorities prevailed fully; Sabre recorded no liability for that matter.
- Additional risks include heavy reliance on travel transaction volumes, supplier direct-distribution strategies and pricing pressure, technology execution and system outages, cybersecurity and privacy liabilities, customer credit risk, and floating-rate debt exposure. Approximately $2.3 billion of debt was LIBOR-indexed. The company reported compliance with its debt covenants.
Most important facts for investors to verify
- How the travel-demand shock and COVID-19 affected actual 2020 bookings, revenue, liquidity, and covenant headroom; the filing’s full-year impact estimate was unavailable.
- Whether technology transformation spending, cloud migration, and reduced capitalization deliver the promised stability, efficiency, cost savings, and eventual margin improvement.
- Whether booking volumes, airline customer retention, supplier content availability, and incentive economics support Travel Network growth and margins.
- The outcomes and cash consequences of the Farelogix regulatory proceedings, US Airways retrial, and ongoing antitrust and tax matters.
- Whether cash generation can sustain dividends, planned investment, and debt service. Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results and debt principal and interest requirements.