Sabre reported a really, solid quarter (Notes on the Q below). The +/- on the Q reads a lot like our preview (HERE) with a beat on revenue and some conservatism on the outlook. There is no surprise there. But as we look ahead we are approaching some rate of change bumps in the road which likely create a little pause here in the Long narrative, so we are going to step to the Bench and revisit later this year.
Short term bumps in the road
First, revenue growth has been accelerating and will hit a short-term peak in 3Q18. Second, FCF will face its first tough comparison of the new management period in 4Q18 with a $40MM Y/Y headwind from expiring DXC credits. Further, the TRA machine was never properly restructured, and management has to pay the meter again in 1Q19. Frustrating! Why can’t they restructure it!? $100MM cash payment is a big deal for a company with $3.4B in debt and $370MM in cash. In addition, the capex benefits to FCF are now in the #s (in buyside numbers for sure), and the next giant step in FCF will be in 2023 ($300MM+ DXC contract expiration) which is too far away to maintain our interest. Management has guided to a 10% increase in FCF in 2019, bullishly not yet in Street estimates, but that is going to have to be based on gradual improvements in software revenue which we’d think will be back half loaded.
To be sure, SABR is not a short. The long term continues to look very good. Sabre is an old, old company that is being renewed and time-shifted into the present of software development which will have an accelerating impact on fundamentals in the 2019-2022 period. We are still early innings for this change.
And the company has differentiated technology across all 3 of its segments (or it will have all 3 by 4Q18) which is new, and should imply that the glimmer of share gains we saw in 2Q18 may just be the beginning of a long road.
So…there are still a lot of long term opportunities. And the sellside who was busy downgrading the stock from September to January is on its way back and seems to be getting ready to upgrade. But the opportunities are 12+ months in period, and we expect a tougher sled between here and January, so we will step to the sidelines with Sabre.