A month has gone by since the last earnings report for Sabre (SABR). Shares have lost about 2.6% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Sabre due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Sabre Reports Q1 Results
Sabre Corporation reported first-quarter 2019 adjusted earnings per share of 34 cents, which decreased 22.7% on a year-over-year basis. However, the figure surpassed the Zacks Consensus Estimate of 31 cents.
Revenues came in at $1.05 billion, up 6.2% from the year-ago quarter. The figure also beat the consensus estimate of $1.03 billion. Growth across each of its business segments drove results.
However, increased technology costs due to high cloud migration related costs, mainframe offload and adoption of flexible development methods was an overhang on margins.
Considering the tragic accidents at Sabre’s PSS customers, Lion and Ethiopian Airlines, suspended operations at Jet Airways and the overall impact of the grounded 737 MAX aircraft, the company lowered its revenue guidance for full-year 2019. This is likely to dampen investors’ confidence in the stock, which has lost 11.8% against the industry’s 12% rally, year to date.
Travel Network revenues increased 7.3% year over year to $774 million. The growth was backed by 7.9% increase in transaction revenues. Increase of 2.7% in bookings and 5% rise in average booking fees drove results for this segment. Positive impact from customer pricing in Europe and contractual increases drove growth in booking fee. New commercial deals and agency conversions supported incentive fee.
In Asia Pacific, year-over-year bookings growth of 0.3% was impacted by the completion of Flight Centre migrations and an unfavorable situation in Jet Airways in India. Bookings in North America increased 6% year over year driven by large global travel management companies, including the expansion of Sabre’s agreement with CWT.
However, unfavorable economic factors and the company’s agency mix in the region resulted in a 3.5% decline in Latin American bookings.
Moreover, EMEA region also suffered a 1.3% year-over-year decline due to a fall in low-margin rail bookings. Continued growth by low-cost carriers and the impacts of three legacy carrier groups trying different distribution strategies affected the performance in this region.
Airline Solutions revenues for the quarter came in at $201.9 million, marking an increase of 3.1% from the year-ago quarter. AirVision and AirCentre revenues decreased 1% due to demigration of Pakistan International Airlines.
Revenues at SabreSonic Passenger Reservation System increased 6% driven by 7% growth of passengers boarded.
Hospitality Solutions revenues jumped 6.9% year over year to $72.8 million, driven by 7% growth in SynXis software and services revenues. Rise in digital marketing services was also a tailwind.
During the quarter, Sabre launched its first set of NDC APIs with United Airlines and next-generation shopping solutions, which are expected to be key growth drivers in the long term.
Management noted that 50% of the company’s entire compute is now transitioned to the cloud. Its shopping complex is now running in two AWS locations and private cloud environment.
Adjusted gross profit came in at $373.1 million, down 7.8% from the year-ago quarter. Adjusted gross margin contracted 530 basis points (bps) to 35.6% due to increased technology costs and Travel Network incentives.
Adjusted operating income decreased 21.2% year over year to $155.8 million. Adjusted operating margin of 14.8% fell 520 bps.
Adjusted operating income for the Travel Network fell 8.8% and adjusted operating margin declined 150 bps due to increase in incentive-related expenses and technology costs.
Adjusted operating income for Airline Solutions decreased 49.8%, which would have grown 8% excluding the impacts of the shift in capitalization mix.
Hospitality Solutions witnessed an adjusted operating loss due to shift in capitalization mix. However, if we exclude the headwind, the segment’s adjusted operating income would have doubled on a year-over-year basis.
Balance Sheet and Cash Flow
Sabre ended the quarter with cash and cash equivalents of $459.5 million compared with $509.3 million in the previous quarter.
Cash provided by operating activities during the quarter decreased to $152 million from $724.8 million in the previous quarter.
Free cash flow was $114.1 million for the first quarter.
During the quarter, $32.1 million worth of shares were repurchased. Including dividends, Sabre returned $70.7 million to shareholders.
Revenues for full year 2019 are now expected to be in the range of $3.97 billion to $4.05 billion, lower than the previously projected range of $4-$4.1 billion. This indicates 3-5% growth as opposed to the earlier expectation of 4% to 6% growth.
Capitalized portion of the total technology spend is expected to decline moderately, and free cash flow is likely to be approximately $455 million, lower than $485 million guided previously, indicating a 3% year-over-year increase. The company expects to return to profitability recovery in 2021.
Sabre expects 4-6% growth at Travel Network in 2019. However, Airline Solutions are expected to decline 2-4% year over year.
Hospitality Solutions revenues are expected to rise 7-9% in the year.
Sabre expects to complete its complete transition to a cloud-first infrastructure by the end of 2023.
For the second quarter of 2019, the company expects a decline in the legacy Tulsa shopping environment. Incentive fee is also expected to normalize to low-mid single-digit growth.
Strong GDS share gain is expected to continue. However, a softer macroeconomic environment is likely to be an overhang on bookings growth. Booking fee is estimated to decline about 0.5 point in the second quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -34.07% due to these changes.
Currently, Sabre has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Sabre has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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