If you switch ‘reflex’ to ‘reset’, this Duran, Duran classic is an appropriate EPS poem…
The reset is a lonely child, who's waiting by the park
The reset is in charge of finding treasure in the dark
And watching over lucky clover, isn't that bizarre?
And every little thing the reset does
Leaves you answered with a question mark
Topline reset, EPS & OP reset, FCF a bit below guidance
Sabre revenue of $923MM was above our estimate of $921MM but below Street $930MM. Full year revenue guidance of $4.01-4.09B also missed Street estimates of $4.085B. Sabre’s adjusted OPM % was down both Q/Q and Y/Y by 100bps. Gross Margin % was back up 100bp Q/Q (still down Y/Y) which is bullish.
Capex to OPEX shift means OCF guidance of $625MM (midpt) for 2019 was well below expectations and down from $725MM in 2018 but offset by a similar sized drop in Capex to $140MM from $284MM in 2018. Management guided to FCF of $485MM in 2019 versus Street at ~$500MM (based on FactSet).
A lotta moving parts & Not enough cushion for Macro slowdown
We stepped out of the way on Sabre back in August due to what we saw as a pivot from beat/raise to miss/lower, mainly due to cyclical factors. Sabre is partially out-running cyclical factors with points of share gain which is super…but the cycle is still there and still implies slower forward growth. We think numbers will get scrubbed again on this point.
On the multiple moving parts…management did their best to explain away each line item of weakness and gave mostly good explanations. For example, the explanation of $30MM of lost business in Airline Solutions makes sense on a backward competitive basis, and the outlook on a forward basis with 75% of revenue locked up in contracts and key competitors facing competitive renewals maybe makes it worth looking past the lost business. But…just remember, this isn’t a one-time loss of business. We hope Sabre is right about the future, but AS has been losing business for a long time now.
On the Hotel Solutions front, in recent notes we highlighted a total lack of urgency in the business. Revenue missed, and the outlook is weak. The company is blaming it on mergers in the hotels business…what are they referring to? Wyndham recently bought La Quinta. That should be a win for Sabre. Marriott bought Starwood in 2017 and completed the integration of the reservations systems in August 2018…the point is, why is there a ‘sudden’ surprise from a hotel merger? These things are slow-moving and don’t get announced every day. We think there is more to go in the Hotel Solutions scrub department and fixing this division will require the CEO to roll up his sleeves and get involved. Huge TAM, tiny growth rate, implies either wrong tech or wrong go-to-market or …
SABR is now ~22x LTM FCF (~20x fwd). We aren’t ready to get excited about the future at this price/valuation with estimates still needing some cyclical (TN) and secular (Hotels) revision work.
Still on the sidelines…
Please call or e-mail with any questions.
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst
