Sabre Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. Sabre provides travel technology through Travel Network, a global travel marketplace, and Airline and Hospitality Solutions, software and hosted services for airlines and hotels. The Travelocity online travel agency business was sold in the first quarter and is reported as discontinued operations.
Financial performance
Amounts below are USD millions, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $785.0 | $672.5 | $2,202.4 | $1,985.3 |
| Operating income | $108.8 | $117.8 | $350.4 | $317.6 |
| Income from continuing operations | $123.1 | $41.2 | $205.0 | $69.6 |
| Net income attributable to Sabre | $176.3 | $36.6 | $416.0 | $22.8 |
| Diluted EPS, continuing operations | $0.44 | $0.15 | $0.73 | $0.24 |
| Adjusted EBITDA | $241.7 | $215.5 | $712.8 | $641.4 |
| Adjusted net income from continuing operations | $80.9 | $62.9 | $231.9 | $172.6 |
Revenue grew 17% in Q3 and 11% year to date. Travel Network revenue increased 22% in Q3 and 11% year to date; Airline and Hospitality Solutions revenue rose 5% and 12%, respectively. Total direct billable bookings rose 29.5% in Q3 and 13.3% year to date, with Abacus contributing materially to the increase. Excluding Abacus, bookings increased 6% in both periods. Airline Solutions passengers boarded grew 4% in Q3 and 5.7% year to date.
Q3 operating income declined despite higher revenue: operating margin was approximately 13.9%, versus 17.5% a year earlier. SG&A rose 46% in Q3, including Abacus operating costs, restructuring and acquisition expenses, acquired-intangible amortization, and higher antitrust legal fees. Cost of revenue rose 16%. Year-to-date operating margin was approximately 15.9%, compared with 16.0%.
Reported net income includes significant nonrecurring and discontinued-operation items. Q3 other income included an $86 million gain from remeasuring Sabre’s former Abacus investment and a $12 million gain from settling a prior agreement. Discontinued operations contributed $53.9 million in Q3 and $213.5 million year to date; year-to-date results include gains on the Travelocity and lastminute.com sales. The Q3 discontinued-operations result also included a $40 million gain related to the Hawaii hotel-tax ruling and refund. These items make reported net income less representative of ongoing operations.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $389.7 million, compared with $285.5 million. Capital expenditures were $203.1 million; free cash flow, defined as operating cash flow less property and equipment additions, was $186.6 million, versus $131.3 million.
- Investing activities used $644.5 million, principally including $441.6 million for Abacus and $203.1 million in property and equipment additions. Financing activities used $39.3 million, including $73.6 million in dividends.
- Cash was $132.7 million at September 30, 2015, down from $155.7 million at year-end 2014. The company reported $384.6 million of available revolver capacity after letters of credit, with no revolver balance outstanding at quarter-end.
- Total debt was approximately $3.12 billion. Current debt included about $422.5 million, principally the $400 million senior unsecured notes due March 2016. The company refinanced $480 million of 8.50% notes due 2019 with $530 million of 5.375% secured notes due 2023, recording a $33.2 million extinguishment loss year to date. Senior secured term loans are primarily floating-rate; $750 million of floating-rate exposure is hedged with swaps.
- Current assets were $789.9 million and current liabilities $1,278.1 million. Management said operating cash flows, cash on hand and the revolver should provide adequate liquidity for operations, capital expenditures and other obligations over the next 12 months.
Material developments, outlook and risks
- Sabre acquired the remaining 65% of Abacus International and interests in two national marketing companies on July 1 for net cash consideration of $442 million, funded with cash and a $70 million revolver draw. Abacus contributed $96 million of revenue and $1 million of continuing-operations income after acquisition. The purchase-price allocation is preliminary; Malaysia NMC acquisition was expected to close in Q4 2015.
- Abacus integration included a restructuring plan, with $9 million of termination-benefit charges recorded. Management expected the plan to be substantially complete by Q3 2016 and did not expect significant additional charges.
- Management expected to continue quarterly $0.09-per-share dividends, subject to board approval. The filing provides no full-year earnings or revenue guidance. Sabre expected an $80–$95 million U.S. tax benefit from completing the lastminute.com wind-down in Q4 2015.
- Key risks include dependence on global travel volumes and airline bookings; supplier and travel-agency contract renewals, pricing pressure and direct distribution; customer concentration; technology availability and third-party service providers; cybersecurity; acquisition integration; foreign exchange and interest rates; and substantial debt. The company disclosed an investigation into a cybersecurity incident involving third-party-managed servers; it had not detected evidence of compromised sensitive personal or payment-card data as of the filing.
- Contingencies include ongoing hotel-tax disputes, antitrust litigation and a Department of Justice investigation. In the US Airways case, the court dismissed the request for declaratory relief, but the plaintiff sought permission to reinstate larger damages claims; Sabre had recorded no liability. Potential Indian tax assessments against Sabre and Abacus were estimated at approximately $40 million if authorities prevailed, and no provision was recorded. The filing also identifies $14 million of Venezuela receivables for which revenue recognition is deferred until collection.
Important facts for investors to verify
- How much of Travel Network’s growth reflects Abacus acquisition effects versus underlying booking growth, and how Abacus integration and the Malaysia transaction progress.
- Whether operating profitability and cash conversion improve as acquisition-related costs and investment spending evolve.
- Plans and funding for the $400 million notes due March 2016, and compliance with debt covenants and refinancing capacity.
- Resolution and financial exposure from antitrust, hotel-tax and Indian tax matters, as well as the outcome and costs of the cybersecurity investigation.
- The final Abacus purchase-price allocation and the timing and amount of the expected lastminute.com tax benefit.