Sabre Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Sabre provides technology and transaction-processing services to the global travel industry through Travel Network and Airline and Hospitality Solutions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $900.7m | $845.2m | $1,816.0m | $1,704.8m |
| Operating income | $18.7m | $142.0m | $182.0m | $313.5m |
| Net income attributable to common stockholders | $(6.5)m | $72.0m | $69.5m | $177.2m |
| Diluted EPS | $(0.02) | $0.25 | $0.25 | $0.63 |
| Adjusted EBITDA | $261.4m | $271.5m | $559.0m | $559.0m |
- Revenue grew 7% in both the quarter and first half. Travel Network revenue increased 6%; Airline and Hospitality Solutions revenue increased 8% in each period.
- Q2 operating margin was about 2.1%, versus 16.8% a year earlier; first-half operating margin was about 10.0%, versus 18.4%. The $92m customer-contract impairment was the principal exceptional charge.
- Q2 Adjusted EBITDA declined about 4%; first-half Adjusted EBITDA was essentially unchanged. These are non-GAAP measures as defined by Sabre.
- Operating cash flow for the first half was $277.9m, compared with $263.8m. Free cash flow, defined as operating cash flow less property and equipment additions, was $110.5m versus $99.2m. Capital expenditures and capitalized implementation costs totaled $198.9m, down from $207.9m.
- Cash was $306.7m at June 30, down from $364.1m at year-end 2016. Current assets were $927.1m and current liabilities $1,077.3m. Revolver availability was $377.8m, after letters of credit.
- Debt carrying value was $3.486bn ($3.518bn face value), versus $3.446bn carrying value at year-end. In February, Sabre refinanced prior term loans with a $1.9bn Term Loan B due 2024; no Revolver borrowings were outstanding. Debt is predominantly floating-rate, with interest-rate swaps used for hedging.
Changes, outlook and material items
- Travel Network booking volume increased: direct billable bookings rose 2.4% in Q2 and 4.2% in the first half. Airline Solutions passengers boarded grew 8.0% and 7.6%, respectively. Management attributed growth in part to Alitalia’s 2016 system cutover and existing customers.
- The $92m impairment, or $59m after tax, followed a dispute with an Airline Solutions customer over implementation services. The charge was primarily noncash; Sabre says the contract may allow recovery of some costs, but the outcome could lead to further income-statement adjustments or cash receipts.
- Sabre recorded $25m of restructuring and other costs in Q2, including a workforce-reduction charge. It also recorded $12m of debt-modification costs in Q1.
- No specific full-year financial guidance is provided in the supplied filing text. Management said operating cash flows, cash on hand and the Revolver should provide adequate liquidity for operations and obligations over the next 12 months. It was reviewing potential debt repricing, subject to market conditions, and expected to continue quarterly dividends subject to board approval. A $0.14-per-share dividend was declared for September 2017.
- Management noted that Airline Solutions growth may be affected by delayed or uncertain implementations, reduced software sales, lower passenger growth, and the previously announced termination of Southwest Airlines’ air reservation system agreement. Professional-services revenue may vary by period.
- Sabre paid $101m, including interest, under its Tax Receivable Agreement in January 2017; it estimated approximately $288m of future payments, excluding interest, in the liquidity discussion. The notes separately estimate $387m of total payments under assumptions that tax benefits are fully realized; the filing text does not reconcile these two estimates clearly.
- Material risks include the unresolved US Airways antitrust judgment (Sabre accrued $32m; estimated possible range $32m–$65m, with an attorneys’ fee request pending and Sabre appealing), a DOJ antitrust investigation, and Indian tax disputes with approximately $45m of potential taxes, interest and penalties if authorities prevailed. These amounts have differing accrual treatment and uncertainty.
- A cybersecurity incident involved unauthorized access to payment-card and some reservation data in a subset of the hotel reservation system from August 2016 through March 9, 2017. The investigation did not find forensic evidence of data removal, but removal could not be ruled out; investigation continued, a class action was filed in July, and potential costs were not estimable. Sabre said there was no indication other platforms were accessed.
Key facts for investors to verify
- Progress, recoverability and any further charges or receipts from the Airline Solutions customer dispute.
- Final US Airways attorneys’ fees and appeal outcome, and developments in the DOJ inquiry and other material litigation.
- Cyber incident investigation findings, potential claims, remediation costs and insurance coverage.
- Debt service, floating-rate exposure, covenant headroom, and the timing and amount of Tax Receivable Agreement payments.
- Whether booking and passenger-volume growth can continue amid supplier pricing pressure, direct distribution, implementation delays and the Southwest contract termination.