Sabre Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Sabre operates Travel Network, Airline Solutions and Hospitality Solutions, providing travel distribution and software technology services. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $984.4 | $900.7 | $1,972.7 | $1,816.0 |
| Operating income | $138.8 | $18.7 | $304.2 | $182.0 |
| Operating margin | 14.1% | 2.1% | 15.4% | 10.0% |
| Net income attributable to common stockholders | $92.2 | $(6.5) | $180.1 | $69.5 |
| Diluted EPS | $0.33 | $(0.02) | $0.65 | $0.25 |
| Adjusted EBITDA (non-GAAP) | $277.0 | $261.4 | $578.3 | $559.0 |
- Q2 revenue grew 9%; Travel Network increased 13%, Hospitality Solutions 10%, while Airline Solutions declined 2%. First-half revenue also rose 9%.
- Travel Network’s growth reflected more bookings and a higher average booking fee. Airline Solutions’ passenger boardings fell 9% in Q2 and 10% in the first half, partly due to the 2017 termination of Southwest’s legacy reservations-system agreement. Hospitality growth was led by SynXis.
- Q2 2017 operating income included a $92 million impairment charge tied to an Airline Solutions customer contract; its absence materially affects the year-over-year GAAP profit comparison. Q2 2018 also benefited from a $19 million deferred-tax-liability remeasurement that reduced tax expense.
- First-half operating cash flow was $341.8 million, versus $277.9 million; capital expenditures were $131.9 million, versus $167.4 million. Free cash flow, as defined by Sabre, was $210.0 million, versus $110.5 million. Cash increased $8.6 million to $370.0 million.
- At June 30, debt was $3.43 billion, including $3.37 billion long-term debt on the balance sheet. The $400 million revolver had no borrowings; $383.1 million was available after letters of credit. First-half interest expense was $77.5 million.
- Current assets were $1.10 billion and current liabilities $1.00 billion. First-half dividends paid were $77.1 million; Sabre repurchased $26.3 million of shares. The board declared a further $0.14-per-share dividend for September 2018.
Comparability, outlook and management commentary
- Sabre adopted ASC 606 on January 1, 2018 using the modified retrospective method. Prior-year figures remain under ASC 605. For first-half 2018, ASC 606 increased reported revenue by $16.9 million and operating income by $14.7 million versus the amounts that would have been reported under ASC 605; adoption reduced opening retained earnings by approximately $102 million before tax.
- Management expected ASC 606 to reduce 2018 Airline Solutions revenue by approximately $15 million to $25 million for existing open contracts, before new sales. The filing does not provide a broader quantified full-year earnings or revenue outlook.
- Management said cash, operating cash generation and revolver availability should provide adequate liquidity for operating and capital needs over the next 12 months. The company expects most remaining Tax Receivable Agreement payments to be made over the next two years; $170 million of estimated future payments remained at June 30, excluding interest.
- Technology investment continued, including platform modernization, security and cloud migration. Management cited higher Travel Network incentive consideration and technology costs, and increasing depreciation and amortization, as cost pressures.
- Sabre’s $3.43 billion debt burden includes floating-rate borrowings; interest-rate swaps and foreign-exchange forwards mitigate but do not eliminate market exposure. The company was still finalizing its accounting for the Tax Cuts and Jobs Act and expected to complete it by Q4 2018.
Risks, contingencies and unusual items
- Antitrust matters: Sabre appealed a $15 million trebled US Airways judgment. It accrued $32 million including estimated legal fees, and disclosed a possible range of $32 million to $65 million. A separate request for approximately $125 million in attorneys’ fees was denied without prejudice pending appeal. A DOJ investigation remains open, with no recent communication disclosed.
- Cybersecurity: Unauthorized access to payment-card and reservation information in a subset of SynXis hotel reservations was identified; a separate hotel-credential incident was also investigated. Sabre said the access was stopped and affected bookings represented a fraction of 1%, but potential costs, penalties and customer indemnities could be material and were not estimable.
- Other contingencies: Indian tax proceedings could, if fully adverse, result in approximately $43 million of taxes, interest and penalties; no liability was recorded. Sabre also disclosed approximately $20 million of Greek VAT receivables, with $8 million of claims under review and challenged by tax authorities.
- Operating risks: Results depend heavily on travel transaction volumes and airline relationships. The filing highlights supplier pricing pressure, direct distribution and competition, system outages and third-party technology providers, data privacy and security, customer concentration, and substantial indebtedness and covenant requirements.
Investor verification points
- Assess underlying earnings growth separately from the absence of the prior-year $92 million impairment and the Q2 2018 $19 million tax benefit.
- Reconcile ASC 606 effects and the stated $15 million–$25 million expected 2018 Airline Solutions revenue reduction against reported results and future guidance.
- Track Travel Network booking growth against rising incentive consideration and cost of revenue, and evaluate the continued decline in Airline Solutions passenger boardings.
- Review debt-service capacity, floating-rate exposure, covenant headroom, cash needs for capital investment, dividends, share repurchases and TRA payments.
- Monitor outcomes and potential financial exposure from the US Airways appeal, DOJ investigation, SynXis incidents, Indian tax litigation and Greek VAT claims.