*Apologies for the delay in publication. Dangers of marketing and trying to find time between meetings to digest complexity and explain analysis.
First, hats off to the bears who fought us on Sabre in the last few months and won. It is never easy to go against the grain, and we salute you with 'nicely done'.
ON THE SUBJECT OF WHAT HAPPENS NEXT…
No guidance for Corona impact means the Street will adjust expectations one quarter at a time, which implies a prolonged period of estimate reduction. So, let’s rip the band aid off together. Let’s assume things get a lot worse and it isn’t until 4Q20 when seasonality returns. Seasonality, of course, will mean that 2021 will be producing air travel volumes at / near airline capacity with normal cyclicality, and thus M/M averages should be built off trailing multi-year volume averages, rather than off of crisis lows. Translation: this is why 'V' shaped crises happen in exogenous situations. Here is our imperfect approach to modeling crisis volumes and recovery for Y/Y LTM rolling transactions:
Under this scenario, combined with the $150MM snafu, we assume $0-$100MM in FCF total in 2020. Essentially, a wipe-out year.
The rebound year in 2021 will look great on the P+L, and cash flow should rebound, but probably held back somewhat by the ongoing investments required to fix Sabre’s cloud migration problems. By 2022, Sabre should have essentially beaten its 2019 FCF as the company will have transitioned part of the infrastructure to Google and new capabilities + larger contracts with existing AS customers (via 2019 re-signings and expansions) should translate to better cash growth.
That’s the cyclical part. Completely unknowable but as analysts we have to try. Modeling the crisis over the next 6 months gives a 'V' shape with 2020 a wipeout year and 2021 the 'V' shaped recovery.
ON THE TOPIC OF THE CLOUD SCREWUP…
We should have known that Sabre was overconfident in its cloud transition as it took Amadeus ten years to produce that result, and long-time Sabre employees who championed the mainframe warned many times that it was unnecessary, costly, and overly time consuming to leave the comfort and safety of the mainframe. A $50MM penalty for mis-estimation seems par for the course; a bad outcome but not impossible to stomach.
As a corollary, the silly $50MM take-or-pay contracts with AWS and Azure signed for 2020 are further heart burn (and a reminder of the hype cycle we have been in when customers throw caution to the wind when trying to associate themselves with a company at the center of the digital narrative). This was a mistake, a big silly ego oops. Does it mean Dave Shirk’s job? Unclear if there is even someone behind him who can take his place. But a mistake on its own can be countenanced as things that happen in the course of complex transitions.
BENDING THE TRUTH…
…But when the CEO pitches the $150MM spending as intentional investment meant to bring the future closer towards the present, an investment meant to accelerate innovation and growth, that kind of crosses the line from ‘truth’ to ‘not so truth.’ Why pretend that to be the case when the CFO candidly told us that 2/3rd of the spending was to fix a mistake, rather than to invest in the future?!
We realize the CEO is under pressure and people say crazy things in those situations. But at this point the credibility goes out the window and rather than being an execution problem, now we are forced to start worrying there is a vision problem.
WHAT WE WOULD DO IN HIS SHOES?
- Set guidance for the full year on best knowledge effort, which means kitchen sink / clean slate (street is still modeling unrealistic numbers from revenue through cash flow, all because SABR couldn’t try to give their best estimate for the year, even it was especially pessimistic. The company needs to put the street in a situation where it doesn’t have to slash numbers every 90 days.)
- Look at flexing the EBITDA leverage ratio to potentially take $500MM additional debt for a buyback (and endorse the dividend)
- Articulate the Google plan in detail: new cost structure, new product, new portfolio of products, and revenue opportunity
- Restructuring / new partnerships
WHAT TO DO WITH THE STOCK?
First of all, from a cycle perspective, you go Long here. This is the cyclical break you have always hoped for. And who knows if $14 is the bottom or if it’s $12. The point is, these are the unconventional openings in cyclicals you don’t often get.
On the secular side we are very bullish on the Google transformation. But, like you, after a print like this, we need more details. Time to double-down and keep digging for the truths underneath.
SABR remains on our Long side while we re-test the secular elements of the thesis from scratch.
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Ami Joseph
Managing Director
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