Sabre Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Sabre operates Travel Network, Airline Solutions and Hospitality Solutions. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1,049.4 | $988.4 | +6% |
| Operating income | $110.4 | $165.4 | -33% |
| Operating margin | 10.5% | 16.7% | -6.2 percentage points |
| Income from continuing operations | $59.2 | $90.4 | -35% |
| Net income attributable to common stockholders | $56.9 | $87.9 | -35% |
| Diluted GAAP EPS | $0.20 | $0.32 | -38% |
| Adjusted EBITDA (non-GAAP) | $262.3 | $301.3 | -13% |
| Cash provided by operating activities | $152.0 | $195.2 | -22% |
| Free cash flow (non-GAAP) | $114.1 | $130.5 | -13% |
Revenue grew, but cost of revenue increased 14% to $787.6 million and SG&A rose 16% to $151.4 million, pressuring operating profitability. The effective tax rate fell to 17% from 29%, partly offsetting the decline in pretax income. The quarter included a $1.5 million after-tax loss from discontinued operations.
Cash and equivalents were $459.5 million at March 31, down from $509.3 million at year-end. Debt carrying value was approximately $3.394 billion, including $75.5 million current debt; the $400 million revolving facility had no borrowings and approximately $385 million available after letters of credit. Cash less reported debt was approximately $2.935 billion. Sabre reported compliance with its debt covenants.
Sabre paid $38.6 million in dividends ($0.14 per share) and repurchased $32.1 million of stock. Operating cash flow declined partly because of working-capital needs, including receivables and compensation outflows; capital expenditures fell to $37.9 million from $64.7 million.
Segments and changes versus prior period
- Travel Network: Revenue rose 7% to $774.0 million, supported by 2.7% growth in direct billable bookings and higher average booking fees. Adjusted EBITDA declined to $242.9 million from $261.6 million. Cost of revenue increased 16%, including higher agency incentive consideration and technology labor costs.
- Airline Solutions: Revenue rose 3% to $212.9 million; passengers boarded increased 6.6% to 186.2 million. Adjusted EBITDA fell to $58.4 million from $74.4 million.
- Hospitality Solutions: Revenue rose 7% to $72.8 million, while central reservation transactions increased 35.7%, partly reflecting Wyndham brand migrations. Adjusted EBITDA declined to $7.0 million from $11.8 million.
Management attributed higher technology costs across the businesses to agile software development, cloud and open-source re-platforming, and investments in platform modernization, stability and security. The company said the shift to agile development is reducing the proportion of costs eligible for capitalization and increasing operating expense. Farelogix acquisition-related costs contributed $11.7 million to Q1 SG&A; total SG&A also reflected higher cybersecurity and corporate systems costs and bad debt expense.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said cash, operating cash flow and the revolver should provide adequate liquidity over the next 12 months, including to fund the planned Farelogix acquisition.
- Sabre agreed to acquire Farelogix for $360 million, expected to close in 2019 subject to customary conditions and regulatory approvals, including reviews by the U.S. DOJ and U.K. Competition and Markets Authority.
- Management expected revenue pressure from Jet Airways’ April 2019 suspension of operations and near-term effects from the 737 MAX groundings. Previously announced airline customer transitions were also expected to temper Airline Solutions growth.
- Sabre expects higher 2019 cash taxes after substantially using U.S. federal net operating losses and some tax credits. It made a $30 million TRA payment in April 2019; a majority of future TRA payments was expected by January 2020.
- Key exposures include travel-volume sensitivity, supplier pricing and direct-distribution competition, technology execution and cybersecurity, and substantial debt and floating-rate exposure. Approximately $2.371 billion of debt was variable-rate and LIBOR-linked; the filing discusses uncertainty from LIBOR’s planned phaseout.
- Material contingencies include the US Airways antitrust appeal: Sabre recorded $32 million and estimated a possible range of $32 million to $65 million, including potential fees. The European Commission antitrust investigation is ongoing; the DOJ investigation remains open, with no recent communication reported. Indian tax litigation could involve approximately $43 million if authorities prevailed fully; no liability was recorded. The company also disclosed potentially material, not reasonably estimable costs from prior hotel-system security incidents.
- Sabre adopted the new lease accounting standard in Q1, recording a $72 million operating-lease right-of-use asset and corresponding liabilities, with no opening retained-deficit impact. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth can translate into improved operating margins as incentive payments and technology investment remain elevated.
- Farelogix closing, funding and regulatory outcomes, and the expected costs or benefits of integration.
- The duration and financial effects of Jet Airways and 737 MAX disruptions, alongside airline customer migrations.
- Progress in technology modernization and cybersecurity, including any additional costs, customer claims or regulatory outcomes related to the disclosed incidents.
- Debt repayment capacity, floating-rate exposure and cash requirements for taxes, TRA payments, dividends and repurchases.
- Developments in the US Airways, European Commission, DOJ, Indian tax and Greek VAT matters; the filing reports approximately $21 million of Greek VAT receivables under challenge without a material accrual.
Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside, not as substitutes for, GAAP results and cash flows.