Sabre Corporation — Q2 2016 Form 10-Q
Business context and reporting period
Sabre provides technology and distribution services to the global travel industry through Travel Network, a travel marketplace, and Airline and Hospitality Solutions, software and hosted services for airlines and hotels. This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Results include the acquisitions of Abacus (consolidated from July 2015) and Trust Group (acquired January 2016).
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $845.2 million | $707.1 million | $1,704.8 million | $1,417.4 million |
| Operating income | $142.0 million | $122.6 million | $313.5 million | $241.6 million |
| Operating margin | 16.8% | 17.3% | 18.4% | 17.0% |
| Income from continuing operations | $75.2 million | $32.6 million | $168.1 million | $81.9 million |
| Net income attributable to common stockholders | $72.0 million | $32.2 million | $177.2 million | $239.7 million |
| Diluted EPS | $0.25 | $0.12 | $0.63 | $0.86 |
| Adjusted EBITDA (non-GAAP) | $271.5 million | $227.6 million | $559.0 million | $471.2 million |
Q2 Travel Network revenue rose 21% to $597.9 million; Airline and Hospitality Solutions revenue rose 16% to $252.2 million. Total Direct Billable Bookings increased 23.9% to 127.8 million, and Airline Solutions passengers boarded increased 43.5% to 199.8 million. The company reported a 29% Q2 effective tax rate, versus 38% a year earlier.
For the first six months, operating cash flow was $263.8 million, versus $268.0 million. Free cash flow, defined by Sabre as operating cash flow less property and equipment additions, was $99.2 million versus $140.0 million. Capital expenditures plus capitalized implementation costs were $207.9 million, up from $157.5 million.
At June 30, cash and equivalents were $68.3 million, down from $321.1 million at year-end 2015. Debt carrying value was approximately $3.256 billion, including $174.0 million current debt; long-term debt was $3.082 billion. Revolver availability was $298.2 million, after outstanding borrowings and letters of credit. Stockholders’ equity was $712.7 million.
Material changes versus prior comparable period
- Revenue increased 20% in both Q2 and the first half. Management attributed much of Travel Network’s growth to Abacus; excluding Abacus, bookings grew 2% in Q2 and 3% for the first half.
- Airline Solutions passenger volumes benefited from American Airlines Group’s migration to SabreSonic CSS in Q4 2015 and growth among existing customers. Trust Group contributed to Hospitality Solutions growth.
- Q2 operating income rose 16%, slower than revenue growth; operating margin decreased to 16.8% from 17.3%. Higher acquisition-related amortization, compensation, incentive consideration, technology costs and other operating expenses contributed to the cost increase.
- First-half net income attributable to common stockholders fell from $239.7 million to $177.2 million, largely because 2015 included $159.6 million of discontinued-operations income, mainly gains on the Travelocity and lastminute.com divestitures. Continuing-operations income increased substantially.
- Interest expense declined 12% in the first half, primarily reflecting refinancing at lower interest rates. The 2015 comparison included a $33.2 million debt-extinguishment loss.
Outlook, management commentary, risks and unusual items
- Management said cash, operating cash flow and revolving-credit access should provide adequate liquidity for operating and capital needs over the next 12 months. It expects to fund an approximately $80 million mortgage maturity and about $113 million of Tax Receivable Agreement payments due in Q1 2017 through cash, revolver borrowings or debt offerings. No formal earnings guidance is provided in the supplied filing text.
- On July 18, 2016, after quarter-end, Sabre arranged a $600 million Term Loan A and a new $400 million revolver, both with stated July 2021 maturities, subject to an accelerated-maturity provision tied to refinancing or repayment of certain existing loans. Proceeds refinanced portions of existing debt and the prior revolver and paid fees; Sabre expected a $4 million extinguishment loss in Q3.
- The estimated Tax Receivable Agreement obligation is $387 million, excluding interest; $112 million was classified as current at quarter-end. The company expects no material payment in 2016 and approximately $113 million, including interest, in Q1 2017.
- Sabre expects stock-based compensation to increase over time following a shift to annual broad-based equity grants. It also noted elevated investment in internal software and technology infrastructure, including an ERP consolidation project.
- Material risks include dependence on travel transaction volumes, airline and travel-agency relationships, pricing and incentive pressures, direct distribution by suppliers, competition, technology outages and cybersecurity, third-party IT services (including HPE), acquisition integration, foreign-exchange and interest-rate exposure, and substantial debt. The filing also discusses Brexit-related uncertainty and Venezuela collection risk; $20 million of Venezuelan receivables remained outstanding and revenue is deferred until cash is collected.
- Legal contingencies include US Airways antitrust litigation, with claimed remaining damages of $45 million or $73 million before potential trebling; Sabre recorded no accrual and the trial was scheduled for October 2016. A separate consumer antitrust case retained a claim for injunctive relief after partial dismissal. Other matters include a DOJ investigation, Indian tax litigation (potential exposure of about $41 million if all claims prevailed), and hotel-tax litigation. Outcomes and potential losses in several proceedings are uncertain.
- CEO Tom Klein intended to resign at year-end 2016. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.
Investor verification points
- Separate organic growth from acquisition effects, particularly Abacus’s contribution to Travel Network bookings and Trust Group’s contribution to hospitality revenue.
- Track operating-margin pressure, incentive consideration, capitalized implementation spending, and the conversion of reported earnings into free cash flow.
- Review post-quarter refinancing terms, leverage covenant requirements, debt maturities, revolver availability, and the planned 2017 mortgage and TRA payments.
- Monitor the US Airways trial and other antitrust proceedings, Indian tax exposures, and the collection and revenue-recognition status of Venezuelan balances.
- Assess whether higher passenger volumes, technology investment, and acquisitions translate into sustained operating growth while controlling costs and execution risks.