Sabre Corporation — Q2 2019 Form 10-Q
Period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Sabre operates Travel Network, Airline Solutions and Hospitality Solutions, providing travel distribution and technology services.
Financial performance
Amounts below are in millions of dollars, except per-share data. Figures may not sum due to rounding.
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $1,000.0 | $984.4 | $2,049.4 | $1,972.7 |
| Operating income | $81.9 | $138.8 | $192.3 | $304.2 |
| Operating margin | 8.2% | 14.1% | 9.4% | 15.4% |
| Income from continuing operations | $28.1 | $92.6 | $87.3 | $183.0 |
| Net income attributable to common stockholders | $27.8 | $92.2 | $84.7 | $180.1 |
| Diluted EPS | $0.10 | $0.33 | $0.31 | $0.65 |
| Adjusted EBITDA (non-GAAP) | $235.6 | $277.0 | $498.0 | $578.3 |
- Revenue grew 2% in Q2 and 4% in H1. Q2 growth across the three segments was partly offset by higher costs: cost of revenue rose 6% and SG&A rose 25%.
- H1 operating cash flow was $257.7 million versus $341.8 million; free cash flow, a non-GAAP measure, was $190.5 million versus $210.0 million. H1 capital expenditures were $67.2 million, down from $131.9 million.
- Cash and cash equivalents were $396.8 million at June 30, down from $509.3 million at year-end 2018. Debt was approximately $3.4 billion, including $82.7 million current debt. The $400 million revolver had no borrowings; reported availability was $388.1 million after letters of credit.
- Current assets were $1,152.6 million and current liabilities $1,120.3 million. Sabre reported compliance with debt covenants.
Business trends and changes
- Travel Network: Q2 revenue increased 1%; direct billable bookings rose 0.9%, while average booking rate and booking mix weighed on transaction revenue. H1 revenue grew 4%, supported by booking growth and favorable rate/mix.
- Airline Solutions: Q2 revenue rose 3%, but passengers boarded fell 7.8%; H1 revenue rose 3% and passengers boarded declined 1%. Customer departures, Jet Airways’ insolvency and the 737 MAX impact on one carrier pressured volumes; new implementation license fees supported revenue.
- Hospitality Solutions: Q2 revenue rose 8% and reservation transactions increased 28%; H1 revenue rose 8% and transactions increased 31%. Wyndham brand migrations boosted transaction volumes but reduced average transaction revenue rates.
- Management said the agile-development transition and shift toward open-source and cloud platforms reduced software-cost capitalization and increased operating expense. H1 expensed hosting, third-party software and R&D costs were $466 million, versus $389 million; capitalized software development fell to $51 million from $120 million.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management said operating cash flows, cash on hand and revolver availability should provide adequate liquidity over the next 12 months, including to fund the planned Farelogix acquisition.
- Sabre agreed to acquire Farelogix for $360 million, funded with cash and revolver borrowings, subject to regulatory approvals and other closing conditions. Regulatory reviews were ongoing; the agreement’s termination date was November 14, 2019, with possible extension to December 5 under specified circumstances.
- Q2 2019’s 30% effective tax rate compared with a nominal rate in Q2 2018, when a deferred tax benefit from use of NOLs against the U.S. transition tax largely offset tax expense. H1 effective tax rates were 22% and 17%, respectively. This comparison contributed to the year-over-year decline in earnings.
- Farelogix acquisition-related costs were $20.6 million in H1. SG&A also reflected higher labor, bad-debt and cybersecurity/corporate-systems costs. H1 bad-debt allowance expense was $13.6 million versus $3.2 million.
- Cash uses included $101.5 million of Tax Receivable Agreement payments, $77.6 million of share repurchases and $76.9 million of dividends in H1. The company expected most future TRA payments to be made by January 2020 and anticipated higher cash taxes as U.S. federal NOLs were substantially utilized.
- Material contingencies include the appealed US Airways antitrust judgment: $15 million trebled damages and a recorded $32 million accrual, with an estimated possible-loss range of $32 million to $65 million. US Airways’ approximately $125 million attorneys’ fee request had been denied without prejudice pending appeal. The EC antitrust investigation remained open; the DOJ investigation had no reported closure. Potential Indian tax assessments could total approximately $43 million if the authorities prevailed, but no liability was recorded.
- The filing describes prior unauthorized access to payment and reservation information in the SynXis hotel reservation system. Potential penalties, indemnities and remediation costs could be material, but the company said the amount could not be reasonably estimated. A separate hotel-credential incident was also under investigation.
Important facts for investors to verify
- Whether booking volumes, customer trends and pricing improve, particularly in Airline Solutions and Travel Network.
- Whether higher technology and incentive costs persist, and whether modernization investments deliver the expected benefits.
- Farelogix regulatory approval, timing, financing and integration implications.
- Cash generation, debt service, higher expected cash taxes and remaining TRA payments alongside dividends and repurchases.
- Developments in antitrust proceedings, Indian tax litigation and SynXis-related investigations or claims.