Sabre Corporation — Q3 2019 Form 10-Q
Business context and reporting period. Sabre provides travel distribution and technology through Travel Network, Airline Solutions and Hospitality Solutions. This unaudited filing covers the three and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $984.2m | $970.3m | $3,033.6m | $2,943.0m |
| Operating income | $113.5m | $136.8m | $305.8m | $441.0m |
| Net income attributable to common stockholders | $63.8m | $73.0m | $148.5m | $253.1m |
| Diluted EPS | $0.23 | $0.26 | $0.54 | $0.91 |
| Adjusted EBITDA (non-GAAP) | $241.6m | $278.5m | $739.5m | $856.8m |
Q3 revenue rose 1%, while operating income fell 17% and common-stockholder net income fell 13%. Operating margin declined to 11.5% from 14.1%. For the first nine months, revenue increased 3%, but operating income fell 31% and net income attributable to common stockholders fell 41%; operating margin was 10.1% versus 15.0%.
Q3 segment revenue: Travel Network $711.0m (+2%); Airline Solutions $208.0m (-1%); Hospitality Solutions $74.8m (+7%). Adjusted EBITDA declined in all three segments: Travel Network $210.3m versus $230.0m; Airline Solutions $66.9m versus $74.1m; Hospitality Solutions $9.6m versus $16.1m.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $424.4m, down from $536.2m. Capital expenditures were $92.1m versus $205.7m; company-defined free cash flow was $332.2m versus $330.5m.
- Cash and cash equivalents were $473.4m at September 30, down from $509.3m at year-end 2018. Current assets were $1,195.9m and current liabilities $1,063.3m.
- Debt carrying value was $3,362.4m, including $82.2m current debt; cash-adjusted debt was approximately $2,889m. The $400m revolver had no borrowings and $388.2m available after letters of credit.
- Sabre reported compliance with debt covenants. It paid $115.2m in dividends and $101.5m under its Tax Receivable Agreement during the first nine months. Quarterly dividend was $0.14 per share.
Material changes and management commentary
- Cost of revenue increased 7% in Q3, driven principally by software development labor, cloud migration and technology platform modernization, stability and security investment. Management said the agile development transition and re-platforming reduce costs eligible for capitalization, increasing current-period technology expense.
- Travel Network booking volume grew modestly; revenue benefited from booking-fee mix and hotel bookings. Hospitality transaction volume rose 14% in Q3, partly reflecting Wyndham brand migrations, which reduced average transaction rates. Airline Solutions passengers boarded fell 5% in Q3.
- Management attributed pressure on growth to Jet Airways’ insolvency, transitioned airline customers, macroeconomic and geopolitical conditions, and European carrier channel shifts. It expected these factors to continue into 2020 and cited a near-term revenue impact from the 737 MAX incident affecting one carrier.
- Management stated that available cash, operating cash flow and the revolver were expected to cover operations, capital expenditures and obligations over the next 12 months, including the Farelogix acquisition. It was reviewing potential refinancing options. The filing provides no quantified company-wide earnings or revenue guidance.
Unusual items, transactions and risks
- Sabre reversed a previously accrued $32m US Airways antitrust loss in Q3 after an appeals court vacated the judgment and remanded the case for a new trial. No loss was accrued at quarter-end. The case remains unresolved; potential damages may be trebled, with attorneys’ fees also at issue.
- Farelogix acquisition: the proposed $360m acquisition faced a DOJ challenge and a U.K. competition authority Phase 2 review. Trial was scheduled for January 2020; the agreement’s extended termination date was April 30, 2020. Sabre had advanced $16m of Farelogix legal fees, credited against the purchase price if completed; termination could trigger up to an additional $30m payment, depending on circumstances.
- After quarter-end, Sabre acquired Radixx for $110m cash on October 15, 2019.
- Other material exposures include the European Commission antitrust investigation, an ongoing DOJ investigation into airline distribution, Indian tax litigation (maximum asserted exposure approximately $43m, not accrued), and unresolved cybersecurity-related costs tied to prior hotel reservation system incidents. Sabre said such cybersecurity costs or obligations could be material but could not be reasonably estimated.
- Major business risks include dependence on global travel volumes and airline customers, supplier direct-distribution strategies and pricing pressure, technology implementation and cybersecurity risks, substantial indebtedness and floating-rate exposure, and regulatory and litigation outcomes.
Most important facts for investors to verify
- Whether booking volumes, segment margins and technology investment trends improve or continue to pressure operating profit and cash generation.
- Progress and final outcome of the Farelogix reviews and litigation, including financing needs, deadlines and potential termination costs.
- Developments in the US Airways remand and other antitrust proceedings, and whether any reserve or disclosure becomes necessary.
- Cash available after the Radixx purchase, expected Farelogix funding, debt refinancing and future Tax Receivable Agreement payments.
- Potential financial effects of cybersecurity claims, Indian tax matters and other contingencies for which the filing states amounts may be uncertain.