Bears to Bulls:
- CEO is fixing the leadership, healing airline relationships, changing the communication with employees, trying to accelerate technology development, and reducing technology costs
- Near term positives include strong data to start 2018, large CRS incrementals in 4Q17-2Q18 thanks to Wyndham, LATAM in 1H18, and positive booking seasonality
After two years of being Sabre bears, we have switched from bears to bulls. We hosted a BB presentation to lay out our thoughts (REPLAY: CLICK HERE). The company will report Q4 earnings tomorrow (Wednesday February 14), before the market opens.
What we fear on EPS as newly minted Bulls:
- DirectConnect causing excess pressure on TN volumes to levels below what we are modeling (Lower DC related volumes should translate to upside revenue per segment capture, but "should" and "will" are not always linear)
- Potential for AHS revenue to go sideways if AA truly exits the platform in 1H18 (we think trailing AA revenue is small thanks to litigation credits and AA preferring to use Sabre mainly for ancillaries, but PB is large)
- The risk that incremental interest expense on floating rate debt hinders FCF growth in 2018 (albeit, they have Eurocurrency floating loans, and swaps to protect near term interest rate risk)
What could work out in our favor:
- 5 of 6 major customers signed on again with Sabre in 2017 to long term deals which could mean backlog strengthens into 2018
- Wyndham + LATAM upticks should help deferred revenue growth – and cash flow
- The RIF (reduction in force) cost $25m…and could yield above guided $110m benefit for 2018 using our understanding of cost per employee
- Management should guide to improving gross margins for TN in 2H18 as capacity from new technology investment helps soften the COGS pressure from mounting look to book ratios
We expect a slight miss on 4Q17 revenue versus Street. Initial data for 1Q18 (January, monthly) is very strong, and points to 1Q revenue nicely ahead of Street, but it is too early to call the quarter off of one month of data. Regardless, as we look into 2018-2019 we see a CEO trying to repair damaged relationships with airlines, improving the technology and cost of the company, and trying to heal a toxic company culture. We like his chances, and think that small improvements in Sabre's execution will have large impacts to the bottom line (FCF) and to the equity.
