Takeaway: Our takeaways from today's call imply more upside ahead

Key Points: 1) competition positives, 2) more costs to come out to drive OCF, 3) scaling up new tech

Summary

Competition - could Sabre be in a position now to win more than their fair share in OTA bakeoffs in the coming years? We know this is a very unorthodox thought process but we think it is the right question to ask as Sabre enters 2018 with differentiated technology.

Costs -  moving software to a single version for customers can potentially reduce development costs but more directly has the potential to reduce implementation expenses, which has been a strong negative OCF headwind.

Scaling up new tech - as we previewed in our BB on 2/2 (HERE), the bigger the new tech gets as % of total bookings, the more efficient the capex envelope, and the higher the future gross margins (we estimate 2019). We think there was plentiful evidence of this trend on today's EPS call.  

Details

Competition

New technology drove an improvement in Sabre’s cost of look-to-book by 50% and improved response time by 25%. We think there is more to go on this effort as the new technology scales to a larger portion of Sabre’s data center capacity in future years. We previewed and explained the new technology and the rollout impact on capacity and margins in our recent BB (link HERE).

We would have been satisfied if Sabre stopped there. But the CEO went further:

“And as each of these OTAs begins to grow around the world, they're balancing, going from a single GDS to a multi-GDS. And in doing that, a lot of those contracts have minimums in place, so you have to -- they end up having a point throughout the year that they're managing those contracts.” And, "so when you do that, it walks through what we have done, the importance of that shopping complex and why we invested in it, why we keep talking about what's happening on the caching side, what's happening on the algorithm side, because it then -- with the response times, you're focused on the low fare efficacy. And we put studies out there, other people have put studies out there. But what I continue to share with individuals is that when you look at our OTA market share around the world, we're slightly right around 50%, I think slightly below 50% right now. This is something that's important. As we get into competitive set with other providers out there, we are always looked at up on the top of where the low fare efficacy is, and there's a lot of work that gets into how do you make sure that all these pieces are syncing properly."

More cost to come out

We previewed that the company was trying to reduce losses in its professional services business. The effort of shifting to a single version has the potential to reduce implementation expense, which would have direct positive impact on OCF.

“Upgrading customers to the latest version of our products is something that's very important. In the past, we've continued to support too many versions of our product lines, which has increased support cost, led to instability issues and limited our ability to cross-sell and upsell the customers. Related to this, we are working closely with our customers as we sunset old versions and local installations of our products. Also, as we shift towards becoming a product-led company, we are accelerating the migration already underway of our product suites to a micro-services architecture with a goal of driving reusability and flexibility across our solutions set.”

“Additionally, seeking to more closely manage and limit product customization and encourage the use of a new extensibility layer at the application interaction level, allowing us to provide the most current innovations to our customers. We expect these changes will increase flexibility and speed to the market, enhance our ability to cross sell and upsell, while reducing maintenance costs and increasing stability of our systems.”

Scaling up the new tech

“And because it only requires 150% of peak capacity, on hand versus the 200% required by traditional disaster recovery solutions, we can scale at significantly lower cost.”

SABR remains a Best Ideas Long.