Sabre Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Sabre provides technology and transaction services to the travel industry through Travel Network, Airline and Hospitality Solutions, and Travelocity. Financial amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $717.6 | $768.2 | $1,473.0 | $1,527.6 |
| Operating income (loss) | $68.1 | $(47.1) | $134.9 | $30.6 |
| Operating margin | 9.5% | (6.1)% | 9.2% | 2.0% |
| Net loss attributable to common shareholders | $(13.1) | $(125.9) | $(25.1) | $(150.6) |
| Basic and diluted loss per share | $(0.05) | $(0.71) | $(0.12) | $(0.85) |
| Adjusted EBITDA (non-GAAP) | $203.7 | $190.1 | $387.4 | $382.6 |
Q2 cost of revenue was $444.3 million, or 61.9% of revenue, versus $467.4 million, or 60.8%, a year earlier. Adjusted EBITDA increased 7% in Q2 and 1% for the six-month period; the filing cautions that this non-GAAP measure is not a substitute for GAAP results.
Six-month operating cash flow was $77.5 million, down from $171.1 million. Capital expenditures were $110.6 million, resulting in negative free cash flow of $33.1 million under the company’s definition, compared with positive $59.6 million. Adjusted free cash flow was $131.2 million versus $107.3 million; this measure adds back specified items, including $95.6 million of Travelocity working-capital effects.
At June 30, cash and cash equivalents were $252.4 million. Debt was $3.092 billion net of discounts ($3.108 billion face value), compared with $3.730 billion net at year-end 2013. The company reported $340.6 million available under its revolver after letters of credit, with no revolver borrowings. Stockholders’ equity was $50.5 million, versus a deficit of $952.5 million at year-end, following the IPO and preferred-stock conversion.
Changes and business drivers
- Reported revenue fell 7% in Q2 and 4% for the first half. Travelocity revenue declined 46% and 39%, respectively, mainly as U.S. and Canadian operations shifted to Expedia’s platform and following the sale of Travelocity businesses.
- Travel Network revenue rose 1% in Q2 and 2% year to date. Total direct billable bookings increased 0.2% in Q2 and 2.4% year to date; management cited lower average booking fees, including effects from the US Airways–American Airlines merger and Venezuela.
- Airline and Hospitality Solutions revenue rose 5% in Q2 and 7% year to date. Airline Solutions passengers boarded increased 5.7% in Q2 and 7.4% year to date.
- Q2 Travelocity Adjusted EBITDA was a loss of $8.9 million, compared with income of $9.1 million. First-half segment loss was $34.1 million, versus near break-even a year earlier.
Capital structure, outlook, and notable items
- The April IPO generated $672.6 million net proceeds. Sabre used proceeds to repay $296 million of Term Loan C and $320 million of 2019 notes, paid the notes’ $27 million redemption premium and $13 million accrued interest, and paid TPG and Silver Lake a $21 million fee before terminating their management-services agreement. The debt transactions generated a $30.6 million Q2 extinguishment loss.
- Management expected the Expedia transition to be substantially completed by year-end 2014. It expected Travelocity revenue after full implementation to be 55%–65% of 2013 levels and costs to be 45%–55% of 2013 levels, with improved margins and profitability; management cautioned that success was not assured. Approximately $9 million of additional 2014 restructuring costs was estimated.
- Management believed operating cash flow, cash on hand, and the revolver would provide adequate liquidity for operations and capital needs over the next 12 months. It noted possible future financing needs, including for $400 million of unsecured notes due in 2016 if not refinanced. The company was in compliance with debt covenants at June 30.
- The company recorded a $321 million tax receivable agreement liability. Based on assumptions including sufficient taxable income, it estimated future payments could total $330 million–$380 million over six years; material payments were not expected before 2017.
- Venezuela’s currency controls delayed collections. Sabre had $10 million of receivables outstanding at June 30 and deferred recognition of future revenue there until cash collection. Management expected 2014 Venezuela revenue to be lower than 2013.
- After quarter-end, Sabre paid $30 million of PRISM contingent consideration and $50 million to American Airlines in connection with a new Airline Solutions contract. The board declared an initial $0.09-per-share dividend, payable September 16, 2014.
Risks and contingencies
- Hotel occupancy, sales, and excise tax disputes remain unresolved; the company reported a $20 million reserve for related issues. Outcomes could exceed recorded amounts. A separate $27 million potential Indian tax exposure was not accrued because management did not consider loss probable.
- US Airways’ antitrust suit claimed $255 million or $420 million in damages before potential trebling. Summary judgment motions were pending; the company said the outcome and any loss could not be predicted. The DOJ investigation was ongoing.
- Sabre reported $27 million of VAT receivables subject to audits and collection uncertainty. Other litigation includes hotel-booking antitrust claims and consumer suits.
- Liquidity is exposed to debt service, operating cash-flow variability, Travelocity transition working capital, and the company’s ability to collect receivables and realize tax assets.
Most important facts for investors to verify
- Whether Travelocity’s Expedia migration delivers the projected cost reductions and profitability, and whether working-capital outflows normalize.
- Whether Travel Network booking growth and average booking fees recover, particularly given airline consolidation and Venezuela exposure.
- Cash conversion and capital needs: first-half operating cash flow was below the prior year and free cash flow was negative before specified adjustments.
- Debt maturities, refinancing plans for the 2016 notes, covenant headroom, and the cash cost and timing of tax receivable agreement payments.
- Developments in antitrust and hotel-tax litigation, VAT recoverability, and other unaccrued or uncertain contingencies.