Sabre Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Sabre provides travel technology through Travel Network and Airline and Hospitality Solutions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $900.6 million | $839.0 million | $2,716.6 million | $2,543.8 million |
| Operating income | $176.8 million | $90.2 million | $358.8 million | $403.6 million |
| Income from continuing operations | $92.8 million | $42.3 million | $166.4 million | $210.4 million |
| Net income attributable to common stockholders | $91.0 million | $40.8 million | $160.4 million | $218.0 million |
| Diluted EPS | $0.33 | $0.14 | $0.57 | $0.77 |
| Adjusted EBITDA (non-GAAP) | $262.9 million | $237.9 million | $821.9 million | $796.8 million |
Q3 operating margin was approximately 19.6% versus 10.7% a year earlier; nine-month operating margin was approximately 13.2% versus 15.9%. Q3 revenue grew 7%, while cost of revenue grew 6%. Nine-month revenue grew 7%, while cost of revenue grew 10%.
- Cash flow: Nine-month operating cash flow was $455.9 million versus $432.5 million. Capital expenditures were $242.8 million; reported free cash flow, defined as operating cash flow less property and equipment additions, was $213.1 million versus $178.3 million.
- Liquidity: Cash and cash equivalents were $268.3 million, down from $364.1 million at December 31, 2016. Revolver availability was $375.8 million after letters of credit.
- Debt: Debt carrying value was $3.470 billion, versus $3.446 billion at year-end 2016. Sabre reported no revolver borrowings. August refinancing reduced applicable interest margins and extended Term Loan A and revolver maturities by about one year; it did not add debt.
- Capital returns: Nine-month dividends were $116.5 million. Sabre repurchased $97.7 million of stock under its $500 million authorization.
Material changes and operating trends
- Travel Network revenue rose 9% in Q3 and 7% for nine months, supported by higher booking volumes and average booking fee rates. Direct Billable Bookings increased 3% in Q3 and 4% year to date.
- Airline and Hospitality Solutions revenue increased 5% in Q3 and 7% for nine months. Hospitality Solutions growth and commercial and operations products contributed. Airline Solutions Passengers Boarded fell 9% in Q3, chiefly following termination of Southwest legacy-reservation services; year-to-date Passengers Boarded increased 2%.
- Q3 SG&A declined $63.3 million year over year, primarily reflecting a $43 million net insurance-litigation reimbursement and lower amortization. The insurance settlement was recorded as a $58 million recovery, partly offset by $15 million of accrued legal and related expenses.
- Nine-month operating income and common-stockholder income declined despite revenue growth. Results included a $92.0 million impairment charge related to AirBerlin contract costs, $25.3 million of restructuring and other costs, and increased cost of revenue. The impairment was recorded in Q2 and was primarily non-cash.
- Adjusted EBITDA increased 11% in Q3 and 3% for nine months; these are non-GAAP measures and exclude specified costs and other items.
Outlook, risks and unusual items
- Management said cash, operating cash flow and revolver availability should provide adequate liquidity for operations, capital spending and obligations over the next 12 months. No specific earnings or revenue guidance was provided.
- Sabre expected adoption of the new revenue-recognition standard in 2018 to reduce consolidated revenue by a preliminary $40 million to $80 million in the adoption year, primarily from Airline Solutions contracts. The estimate was still being quantified and could change.
- AirBerlin entered insolvency proceedings after Sabre recorded the $92 million contract-cost impairment. Sabre said further adjustments may be possible as the dispute proceeds.
- A cybersecurity incident exposed payment-card and some reservation information in a subset of hotel reservations processed through the SHS Central Reservation System. Sabre said access had been stopped; potential costs, penalties and other impacts could be material but were not estimable. A related class action was pending at the filing date.
- Legal exposures include the appealed US Airways antitrust judgment, with a recorded $32 million accrual and estimated possible outcomes of $32 million to $65 million, including fees; a DOJ antitrust investigation with no stated resolution; and Indian tax proceedings with a potential exposure of approximately $47 million if authorities prevailed. The filing says the Indian outcome was not considered more likely than not and no liability was recorded.
- Venezuelan customer receivables totaled $25 million; revenue is deferred until cash collection. Sabre also cited travel-volume dependence, supplier pricing and direct-distribution competition, high leverage and floating-rate debt, and technology, implementation and cybersecurity risks.
Important facts for investors to verify
- Progress and recoverability of the AirBerlin dispute and whether additional impairment or contract adjustments are required.
- Final revenue and balance-sheet effects of the 2018 revenue-recognition transition, especially the preliminary $40 million to $80 million revenue reduction.
- Ultimate costs, insurance recovery, regulatory consequences and litigation developments related to the hotel-system cybersecurity incident.
- Outcomes of the US Airways appeal and attorneys’ fee claim, DOJ investigation, and Indian tax litigation.
- Debt service, covenant headroom and liquidity after dividends, share repurchases, capital spending and Tax Receivable Agreement payments.
- Whether Travel Network booking growth and Hospitality Solutions gains can offset Southwest-related pressure and weaker Q3 Airline Solutions passenger volumes.