Sabre Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 9 speakers on the call.

Operator

Morning, ladies and gentlemen. Welcome to the Sabre First Quarter 2023 Earnings Conference Call. My name is Olivia, and I'll be your operator. As a reminder, please note today's call is being recorded. I will now turn the call over to the Senior Director of Investor Relations, Brian Roberts.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Livia, and good morning, everyone. Welcome to Sabre's Q1 2023 earnings call. This morning, we issued an earnings press release, which available on our website at investors. Sabre.com. A slide presentation, which accompanies today's prepared remarks, is also available during this Call on the Sabre Investor Relations webpage.

Speaker 1

A replay of today's call will be available on our website later this morning. We advise you that our comments contain forward looking statements that represent our beliefs or expectations about future events, including the effects of COVID-nineteen, industry and recovery trends, Benefits from our technology transformation and commercial and strategic arrangements, financing and related transactions, our financial outlook and targets, expected revenue, Adjusted EBITDA, free cash flow, costs and expenses, cost savings and reductions, margins and liquidity among others. All forward looking statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. More information on these risks and uncertainties is contained in our earnings release issued this morning and our SEC filings, including our Q1 2023 Form 10 Q. Throughout today's call, we will also be presenting certain non GAAP financial measures.

Speaker 1

References during today's call to adjusted operating income, adjusted net income, Adjusted EBITDA, adjusted EBITDA margin, adjusted EPS and free cash flow have been adjusted to exclude certain items. The most directly comparable GAAP measures and reconciliations for non GAAP measures are available in the earnings release and other documents Posted on our website at investors. Sabre.com. Participating with me are Kurt Ecker, our President and CEO And Mike Randolphi, our Chief Financial Officer. Scott Wilson, EVP and President of Hospitality Solutions will be available for Q and A after the prepared remarks.

Speaker 1

With that, I will turn the call over to Kurt.

Speaker 2

Thanks, Brian. Good morning, everyone, and thank you for joining us. I'm excited to be here today as Sabre's new CEO. I joined the company 16 months ago because I believe there are tremendous opportunities for Sabre to address The evolving demands of the travel marketplace. We operate in a dynamically changing and huge industry Where customers demand modern technologies that deliver innovation at pace and scale.

Speaker 2

With that comes significant opportunity to grow our business. On today's call, Mike and I will be sharing strategic plans designed to reposition Sabre's business for long term profitable growth, To lean into new revenue opportunities, while continuing to cultivate our core business and to structurally reduce our cost base. We believe these strategic priorities put us on a durable path to achieve our 2023 financial expectations and our 2025 targets. And we are committed to delivering growth and value to our customers and shareholders. Before jumping into the detail of today's call, let's walk through the agenda.

Speaker 2

On Slide 4, you can see an overview of the topics that Mike and I will cover. I will start by outlining 4 key strategic priorities. Next, I'll explain the exciting growth opportunities that lie ahead for Sabre. And I will discuss how we expect our technology transformation will create improved efficiency, enhance our value propositions And enable the development of differentiated product offerings. Finally, Mike will take you through the financial results 1st quarter, outline in more detail our plans to reduce costs and realign resources to support Sabre's growth opportunities And provide our financial outlook for 2023 2025.

Speaker 2

Turning to Slide 5. To build on my opening remarks, let me take a moment to describe 4 key strategic priorities that form the foundation of our long term direction for the company. 1st, generating free positive free cash flow and delevering the balance sheet Our most important financial objectives. As Mike will detail in a moment, we believe we have a durable path To achieve our 2023 expectations and to generate over $500,000,000 in free cash flow in 2025. 2nd, we will continue to focus on execution and delivering sustainable growth in our core businesses over the long term.

Speaker 2

For example, we are gaining share of industry air bookings, capturing increased volumes from our existing customers and partners And intend to continue to build momentum. 3rd, we have to continue to drive innovation And enhance our value propositions with both existing and new customers. The future of travel demands a different set of capabilities And we plan to deliver the merchandising and retailing tools of tomorrow to capitalize on the opportunities in this changing marketplace. We are outlining today growth initiatives that we believe will do just that and I'll share these in a moment. 4th, we plan to reduce our cost base and reposition our resources towards specific opportunities for future growth.

Speaker 2

We will go into detail shortly, but with the actions we are announcing today, we expect to reduce costs by $100,000,000 in 2023 An estimated annualized $200,000,000 in 2024. We believe these actions solidify our path to our free cash flow and adjusted EBITDA objectives. Now let me go into each of these priorities in more detail, Explaining how they will help us help put us on a durable path to our 2025 targets. Turning to Slide 6. As I stated previously, generating positive free cash flow and delevering the balance sheet are our most important financial objectives.

Speaker 2

This slide outlines the milestones we believe will enable us to accomplish these objectives to the benefit of Sabre stakeholders. First, we expect to be free cash flow positive in 2023, excluding restructuring costs. And in a few minutes, Mike will walk you through the specific actions we are taking to achieve that outcome. 2nd, we are targeting over $500,000,000 in free cash flow in 2025 And we believe that we will be on a path as we exit 2025 to achieve our leverage target of 2.5 times to 3.5 times. Before I go any further, I'd like to discuss our outlook for travel volumes.

Speaker 2

Today, we see historically high airfares, Elevated load factors and significant efforts by carriers to add capacity. Furthermore, IATA capacity forecasts Indicate strong growth in the upcoming years. We expect this to be further bolstered as international markets, Specifically Asia Pacific continue to gain traction. Given these dynamics, we are optimistic about long run growth trends. Over the past year, we have seen a range of growth rates in the GDS marketplace.

Speaker 2

Some quarters have experienced sequential quarterly improvements in the double digits, While others including the most recent couple of quarters saw growth only in the low single digits. What we will show you here today is that even under a conservative industry volume scenario, we believe we have a durable path to achieve our financial targets That is almost exclusively driven by factors under our own control. If the industry demonstrates a stronger rate of growth And what we have seen in the most recent quarters as we believe is very possible. Given the operating leverage we are building, We believe we will have meaningful upside to the 2023 2025 targets we are outlining here today. Now let's turn to Slide 7.

Speaker 2

Moving on to the second of our key strategic priorities, which is to drive sustainable growth in our core businesses. As you can see from this table, our share of GDS Industry bookings increased year on year in Q1 2023, Both including and excluding volumes associated with Expedia. Importantly, after removing Expedia volumes, Sabre was a larger proportion of industry air bookings in Q1 'twenty three than in the Q1 of 2019 2022. Please turn to slide 8. This table further highlights the success we have experienced delivering sustainable growth With our existing core customer base.

Speaker 2

The chart depicts industry bookings with the largest 25 agencies in the world, excluding Expedia And based on MIDT information, which is the GDS industry standard. As depicted by the green arrows in the chart, SAFR has grown with nearly 3 quarters of the largest agencies year to date versus the most recent trailing quarter. We are confident that we will continue to realize sequential gains based on known contract wins and renewals And upcoming opportunities within our commercial pipeline. Turning to Slide 9, moving to the third of our key strategic priorities, Which is to drive innovation and enhance Sabre's value propositions with new and existing customers. On this slide, we've outlined specific growth strategies to drive incremental revenue by building and delivering new value to our existing customers.

Speaker 2

Many of these initiatives are close to our core capabilities, but enable us to grow our revenue by growing our share of wallet with existing customers, Building and delivering new value with both existing and new customers that capitalizes on revenue opportunities that exist in our changing travel ecosystem And expanding our existing offerings into new and underpenetrated geographies or marketplace segments. Across our Travel Solutions business segment, we have a number of key strategic growth areas. Our GDS expansion strategy consists of targeted product innovation as well as people and service investments to drive growth in specific geographies And marketplace segments. We have consistently won with many of the largest travel agencies and buyers And we believe this initiative will continue to support above market growth with this important customer segment. In support of this strategy, we recently announced a new distribution agreement with Air India, which has not been in the Sabre GDS.

Speaker 2

In the Q1 of 2023, India had the 2nd highest number of GDS bookings among all countries in the world And Air India ranked in the top 10 of global carrier GDS bookings. As of today, this content is live in our system. Our multi source content platform strategy of which new distribution capability or NDC is an essential component It is designed to grow our business by efficiently increasing access to all relevant air content and creating a true marketplace for sellers And buyers. We believe Sabre is uniquely positioned to solve the ecosystem challenge of providing a unified technology solution For all key industry participants that brings together both Etefact and NDC content. This unified functionality is an essential part of our multi source content platform strategy and is needed to efficiently handle the complexity That integrating NDC and Edifact brings to buyers.

Speaker 2

Importantly, we achieved several NDC milestones during the quarter And continue to make very good progress. While NDC volumes are still very small for the industry and Sabre, our NDC offering is gaining traction And in carriers. And we have recently successfully launched NDC with American, United and Finnair. Next, we see significant opportunity to grow an existing capability to become the premier lodging platform for our agency customers for business to business travel. We intend to do this by further developing and extending our content lodging services platform.

Speaker 2

The core of this initiative is centered around the dynamic consumption and distribution of accommodation content supported by intelligent display and retailing. This opportunity is highly complementary to our air distribution offerings and existing hotelier and buyer customer relationships. We believe that the airline IT industry is at a pivot point, moving to intelligent offer creation And multi source order creation and delivery. We plan to grow our Airline IT business over time by enhancing our Airline Solutions product offerings To both existing and new airline customers with best in class intelligent retailing solutions Built on a modular platform with order and offer technology at the core. These offerings are designed to help our airline customers optimize And diversify their revenue streams and enable them to build more personalized experiences for travelers, which we expect will lead to higher conversion and revenue growth.

Speaker 2

In our Hospitality Solutions business, we expect double digit annual growth in revenue And to achieve double digit adjusted EBITDA margins as we exit 2024. We have a rich pipeline in Hospitality Solutions And see revenue growth coming from new customer wins, property additions and from our intelligent retail offering, which includes Retail Studio And new Vola. Importantly, as our platform expands to include additional properties, Our opportunity to upsell our hospitality customers on our powerful suite of intelligent retailing solutions will grow. As we shared last quarter, we expect this business to be roughly breakeven on a fully allocated basis in 2023 And again to be a meaningful EBITDA contributor in the years ahead. Last, we are excited to be stepping into the payment space, Which presents a relatively new revenue growth opportunity that also benefits from the customer relationships in our Travel Solutions and Hospitality businesses.

Speaker 2

We believe the long term opportunity for growth in the travel payment space is very large. And with our acquisition of Confirma, Coupled with Sabre and Confirma's strategic relationship with Mastercard, we are positioned competitively to become a leader in the virtual payments marketplace In the coming years, we now have the capability to digitize payments in B2B travel, which not only streamlines customers access to multiple We recently hired a fantastic leader and industry expert in the payment space to run the Confirma business. As a whole, these growth strategies are an important part of how we plan to grow Sabre's business over time. We must continue to innovate to capitalize in the fast changing travel ecosystem And enhance our value propositions to both new and existing customers. Now turning to Slide 10.

Speaker 2

Our technology transformation is a key enabler to bring innovation and new capabilities to our customers at pace. Benefits we are realizing already include faster speed to market, enhanced stability and security, Reduced latency and more seamless software deployments. Our innovation partnership with Google also provides great promise. And a few anecdotal examples of this include having Google's AI and ML capabilities embedded in our new ancillary IQ product And our recent partnership on some key commercial pursuits. Turning to our recent achievements.

Speaker 2

As of the end of the Q1, We have successfully migrated 69% of our total compute capacity to Google Cloud. With the move to Google Cloud, our unit cost of compute Capacity is about 35% of what it was prior to our transformation efforts. Now that we've exited the last of our Sabre Managed data centers, Our major tech transformation goal for 2023 is to migrate our legacy mid range server environment in Tulsa to Google Cloud. We are on track to achieve that goal and in the Q1 we made good progress by migrating more than 400 servers, more than 70 external network connections And more than 50% of our customer facing web services traffic into the cloud. As we have articulated previously, The cost savings from our tech transformation will provide significant operating leverage to our financial performance and we expect to fully realize this benefit as we exit 2024.

Speaker 2

Turning to Slide 11. Today, we are announcing a resource realignment To improve our organizational structure, meaningfully reduce costs and achieve greater efficiency. We expect these actions to deliver $100,000,000 in cost savings in the second half of twenty twenty three And an additional $100,000,000 in savings in 2024 for a combined $200,000,000 in annualized cost reductions. As a meaningful part of these actions, we expect to reduce our total employee and contractor base by about 15%, most of which we expect will occur by the end of the second quarter. As a new CEO, it pains me to take these steps, Especially so early in my time in the role.

Speaker 2

I do not take this decision lightly, especially given the immense respect that I have for all of my Sabre colleagues Around the world. However, I am confident that these actions will better position us for the future And put us on a direct path to achieving our financial and strategic targets. Importantly, I want to emphasize that we will continue to invest heavily In our technology transformation, in the key growth strategies I have outlined today and in meeting our commitments to our customers, Sabre has and will continue to compete aggressively and successfully to deliver industry leading products and services. I will now hand the call over to Mike to walk you through our Q1 performance and longer term financial plan and targets.

Speaker 3

Thanks, Kurt, And good morning, everyone. Please turn to Slide 12. Before I get into the Q1 results, I want to add additional context about how we're approaching 2023 and the path to our long term targets. As Curt noted, we're focused on driving innovation, Enhancing Sabre's value to our customers and aligning resources toward our growth initiatives. We are optimistic about travel volume growth In the coming years, but we believe we have a durable path to achieve our financial objectives even under a more conservative industry growth scenario.

Speaker 3

We are proceeding with the path to our 2023 expectations and 2025 targets that is largely based on a set of actions That we have line of sight to and believe we could execute upon. Only a small portion of 2023's adjusted EBITDA improvement And the build toward 20 25's adjusted EBITDA targets are driven by industry volume increases. If the industry recovery accelerates, which we believe is very possible, given the operating leverage we are building, This would drive meaningful upside to our 2023 2025 targets. While our emphasis is on growing revenue In our bill to 2025, approximately half of the incremental adjusted EBITDA or approximately $300,000,000 is driven by our focus on cost efficiency and benefits from our tech transformation. From our resource realignment and cost efficiency efforts, we expect to generate $100,000,000 of expense savings in the second half of twenty twenty three And $200,000,000 of expense reduction annually in 2024.

Speaker 3

Now referring to the slide. As you can see from the table on the left, we exceeded our expectations for the Q1 revenue and adjusted EBITDA. Free cash flow was essentially in line with our expectations. The table on the right highlights the solid growth that we saw in the Q1 in overall bookings. 1st quarter distribution bookings were up 49% From Q1 2022 as Sabre's volumes grew faster than the industry overall.

Speaker 3

Turning to Slide 13. Total Q1 revenue was $743,000,000 An increase of $158,000,000 or 27% versus last year. Distribution revenue totaled $526,000,000 $183,000,000 or 53 percent increase compared to $343,000,000 in Q1 2022. Our distribution bookings totaled $97,000,000 in the quarter, a 49% increase compared to $65,000,000 In Q1 2022, our average booking fee was $5.44 in the Q1, up 3% from the Q1 2022. We continue to see favorable mix into more profitable regions and type of travel resulting in higher booking fees And we believe this trend is likely to continue in 2023.

Speaker 3

IT Solutions revenue totaled $152,000,000 in the quarter. This was a $40,000,000 decline versus revenue of $191,000,000 in the comparable prior year period. Passengers boarded totaled $165,000,000 a 28% improvement from $129,000,000 in Q1 2022. 1st quarter revenue growth from passengers boarded and other IT solutions business was more than offset by the impact of Sabre no longer having air center revenue, Which contributed approximately $36,000,000 in Q1 of last year and lower revenue from our airline IT business in Russia, which also Had a $37,000,000 impact. Hospitality Solutions revenue totaled $74,000,000 An $18,000,000 or 32 percent improvement versus revenue of $56,000,000 in Q1 2022.

Speaker 3

Central reservation system transactions totaled $28,000,000 in the quarter and were 20% above $23,000,000 in Q1 2022. The average rate per transaction added approximately 12 points to revenue growth, Driven by ancillary revenue streams and a favorable mix shift. Adjusted EBITDA of $58,000,000 was better year over year as compared to the $5,000,000 in Q1 2022. Free cash flow was negative $91,000,000 in the first quarter, essentially in line with our We ended the Q1 with a cash balance of $838,000,000 Moving to Slide 14 to discuss our guidance. We expect Q2 2023 revenue of approximately $700,000,000 Adjusted EBITDA of approximately $45,000,000 and negative free cash flow of between $60,000,000 $80,000,000 inclusive of restructuring charges.

Speaker 3

If you exclude the restructuring charges, we would expect negative free cash flow of between $40,000,000 $50,000,000 As a reminder, pursuant to our sale of Air Center, we are required to pay down debt with any uninvested proceeds from that sale by May 24, 2023. Currently, we expect that amount to not exceed $80,000,000 For the second half of twenty twenty three, we expect revenue of approximately $1,400,000,000 Adjusted EBITDA between $200,000,000 $220,000,000 and positive free cash flow in both the 3rd and 4th quarters. For the full year 2023, we continue to expect revenue between $2,800,000,000 $3,000,000,000 And adjusted EBITDA between $300,000,000 $320,000,000 and we expect to be free cash flow positive for the full year 2023, Excluding the impact of restructuring. Moving to Slide 15. As Curt mentioned earlier, Our resource realignment and cost reduction plan is expected to deliver $100,000,000 in savings in 2023.

Speaker 3

This plan includes a workforce reduction of approximately 15% that we expect will largely occur before the end of the second quarter. These cost savings will include a streamlining of spans and layers in our management and employee base and improved and more efficient organization design that Our growth initiatives and an evaluation of our geographic and real estate footprints. At the same time, we are prioritizing investments Toward our strategic growth initiatives. We expect the annualized benefit of these actions taken in 2023 To be $200,000,000 in 2024. Moving to Slide 16.

Speaker 3

This chart provides the path for how we expect to achieve our 2023 adjusted EBITDA guidance. For the first half of twenty twenty three, based on the guidance we have provided today, we expect to generate approximately $103,000,000 Prior to taking into account other earnings drivers, if we take the first half adjusted EBITDA And apply historical seasonality that would imply expected second half adjusted EBITDA of approximately $85,000,000 This would be the adjusted EBITDA build prior to taking into account cost reductions, benefits from our strategic initiatives And industry volume growth. Building upon the first half and second half seasonally adjusted EBITDA Are the cost actions that we have announced today that we expect will generate $100,000,000 of benefit in the second half of twenty twenty three. Additionally, we believe our strategic growth initiatives outlined earlier can contribute approximately $20,000,000 this year. Also as noted in my earlier remarks, industry volume growth is a small component of our build to 2023 adjusted EBITDA And represents only $10,000,000 of expected benefit for the remainder of this calendar year.

Speaker 3

We believe this approach creates a durable path Toward our expectations for 2023 adjusted EBITDA of $300,000,000 to $320,000,000 Based on a sequential industry volume growth rate of 1.5 points per quarter in the 3rd 4th quarters. Should the growth rate be higher, that will be upside to our expectations. For example, as noted on the slide, If the sequential growth rate is closer to 4.5 points in the second half of twenty twenty three, that would add an additional $30,000,000 to adjusted EBITDA and free cash flow this year. Moving to Slide 17. Now we walk you through how we plan to generate positive free cash flow excluding restructuring costs in 2023.

Speaker 3

As you can see from the table, we expect sources of cash in 2023 to be between $450,000,000 $470,000,000 The working capital initiatives that we discussed in our February earnings call are currently underway and we still expect to drive $150,000,000 In positive working capital benefits this year. Our cash interest is still expected to be approximately $390,000,000 in 2023. We also expect 2023 capital expenditures of about $50,000,000 To highlight, We believe we've developed a durable path to generate positive free cash flow in 2023, excluding restructuring, Relying less on industry volume growth and to a much greater extent on actions that we have line of sight to and that we could execute upon. While we believe that a faster recovery remains a strong possibility, we have made the decision to rely less on external industry factors to achieve our expectations and have derisked our 2023 performance by taking more of the end result Under our own control through cost reductions. Moving to Slide 18.

Speaker 3

Now I will walk you through how we expect Our 2023 adjusted EBITDA to build toward our 2025 target of greater than $900,000,000 We remain confident in Sabre's ability to generate this level of adjusted EBITDA in 2025, but we've now developed a different path towards this target, One that includes lower expenses and additional efficiency gains versus the prior path, which assumed a stronger industry recovery. We now expect the combined cost savings from our technology transformation and the resource realignment announced today To drive approximately $300,000,000 by 2025. It's important to note that about half of our expected improvement And adjusted EBITDA from 2023 to 2025 is driven by lower costs, which are under our control. We expect our strategic growth initiatives highlighted earlier on today's call to generate approximately $150,000,000 We expect this $150,000,000 contribution to be driven roughly equally by the following three areas. 1st, Hospitality Solutions revenue growing at double digits and achieving double digit margins by the

Speaker 4

end of

Speaker 3

2024. 2nd, our GDS expansion strategy continuing to drive above market growth from increases in share of wallet and competitive wins And finally, growth from our payments and airline retailing initiatives. Moving to volume growth. While we remain optimistic about the future trajectory of travel volumes, we are now relying less on the contribution from overall industry volume gains. Our underlying assumption, which we believe is conservative with respect to the targets we are articulating today, Is that industry volumes improve approximately 1.5 points per quarter between now 2025, Averaging about a 75% recovery for the full year 2025 and supporting approximately $150,000,000 As we've noted previously, based on indicators from our airline partners, we are optimistic About the future increases in airline industry volumes.

Speaker 3

Should industry volumes increase at a faster pace And reach closer to pre pandemic levels that would provide meaningful upside to these targets we are presenting today. To help quantify this, with the cost structure we are developing, each point of additional volume growth is worth approximately $12,000,000 of adjusted EBITDA, which will flow directly down to free cash flow. Assuming a full recovery Would imply up to $300,000,000 of potential upside to our 2025 targets. Collectively, we believe We have developed a durable path toward our 2025 target of $900,000,000 in adjusted EBITDA. Moving to Slide 19.

Speaker 3

We believe achieving greater than $900,000,000 in 2025 adjusted EBITDA Would establish the base to generate greater than $500,000,000 of free cash flow in 2025. Assuming a similar interest rate environment as today, we expect 2025 cash interest to be less than $350,000,000 We expect capital expenditures to be between $50,000,000 $60,000,000 Collectively, With this level of adjusted EBITDA, cash interest and capital expenditures, we expect to generate greater than $500,000,000 of free cash flow In 2025, importantly, this will allow Sabre to meaningfully delever the balance sheet. Moving to Slide 20. This slide outlines how we intend to delever our balance sheet and highlights meaningful progress toward that path by 2025 With the target subsequently achieving our 2.5x to 3.5x net debt to adjusted EBITDA levels. As of the end of the Q1 of 2023, our net debt balance was $4,100,000,000 Based upon our free cash flow targets, we expect to be able to reduce our net debt balance to be between 3.4 And $3,500,000,000 by the end of 2025.

Speaker 3

We expect that balance to decline further thereafter As we generate free cash flow and work to reduce debt, we're generating greater than $900,000,000 of adjusted EBITDA in 2025, We believe by 2025, our net debt to adjusted EBITDA will approach 3.75 times And we expect to be on a path to reach our target leverage of 2.5 times to 3.5 times. And with that, I'll hand it back to Curt. Thank you, Mike. Before opening the line for your questions,

Speaker 2

I will provide a few closing remarks. First, we have shared a lot of information with you today about our 2023 expectations, 2025 targets and our durable path to these outcomes. I am confident we have the plans and the leadership in place to help us achieve our goals and I look forward to keeping you updated on our progress. 2nd, I extend my deep Appreciation to Shawn Menke for his many years of service at Sabre. We are thankful for his steadfast leadership, especially during unprecedented times and look forward to continuing to partner with him in his capacity as Chair of our Board.

Speaker 2

I know I speak for the entire Sabre team when I say thank you, Sean. With that operator, please open the line for questions.

Operator

And our first question coming from the line of Charles Barron with Morgan Stanley. Your line is open.

Speaker 5

Great. Thanks for the question and appreciate all the detail on the slides. I was hoping you could talk a little bit more about the new for the Strategic Growth Initiatives. And really wondering the confidence in the $150,000,000 contribution To EBITDA in the 2025 targets, just thinking through the 3 buckets that you mentioned, some rely on some competitive wins And growth initiatives, like wondering the margin profile there too, if that's kind of implying like an incremental $1,000,000,000 Plus revenue opportunity from that strategic growth.

Speaker 2

Josh, thank you. This is Kurt. I appreciate the question. First of all, as we look at the strategic growth, the growth strategies that we've articulated today, it's important to note that They're all relatively close to our core business. Payments is the most far field.

Speaker 2

We've hired a payments expert to lead that business. We have the relationship with Mastercard and that Strategy will leverage actually the existing relationships we have both in the TS and HS businesses. As you look at the growth strategies, GDS market expansion to your point It's a very high margin business. Obviously, there is a cost of revenue there as there is in that part of our business. But We expect great operating leverage with GDS expansion because it requires some additional feet on the street, some additional product investment.

Speaker 2

But Once you win either greater share of wallet or you convert new customers, that business has a great flow through. As you look at each of the other strategies, there is an investment required to initiate or drive that growth, but they all come with very high operating And very high unit margin because we're not building anything from scratch. For example, if you look at hotel distribution as an opportunity Or you look at payments as an opportunity by extending them and selling them into existing clientele, we're effectively putting more product on the shelf And we don't need to replicate a lot of the infrastructure that we already have. So our expectation is that overall, the Growth strategies actually will come with a higher unit margin than our existing or incumbent business.

Speaker 5

Thanks. That's really helpful. Second question on NDC. Just wondering in your 2025 targets, is there any Context for what assumption you're making as far as the mix of NDC? And As a follow-up, like what happens to your economics when you facilitate an NDC bookings versus traditional?

Speaker 2

Thanks, Josh. It's important to note that today NDC as a percentage of Intermediary Airline Distribution It is low single digits overall for the industry as well as for Sabre. As we look forward to 2025, We certainly do expect that NDC will gain additional traction and we have NDC maturing As an expectation within our 25 target profile, I can tell you that commercially there is no one size fits all for NDC. We've negotiated now a number of different agreements for negotiation for a number of others. And so what I can tell you is that Looking at what we project as the adoption curve coupled with the financial profile inclusive of NDC As well as the growth strategies we've articulated, we are confident that you'll see Sabre realized unit margin accretion in the quarters and the years ahead.

Speaker 5

Okay, great. Thanks. I'll hop back in the queue.

Operator

Thank you. And our next question coming from the line of Jed Kelly with Oppenheimer, your line is open.

Speaker 4

Hey, great. Thanks for taking my question. Just looking at the updated longer term targets, the right way to think about it is, It's $900,000,000 of EBITDA with bookings at 75% recovered versus I guess the prior guidance that was 900,000,000 EBITDA at the low end with 80% bookings. Is that correct?

Speaker 3

Yes. That's the right way to be that's the right way to think about it.

Speaker 4

Okay, great. And then just two questions. I mean, I know you might not you probably can you kind of give us a path to what 24 looks like. Are we going to have to assume a pretty material step up in 2024 to get to 25? And Historically, I know it was under previous management, but I think this is a company that accounts 3 times since like 2015 has Given medium term guidance and it's never hit its profitability guidance on something that came up.

Speaker 4

So Is there any contracts or potential issues that could come up that we should be thinking about that would cause you not to hit this guidance?

Speaker 2

Jed, this is Kurt. Thank you. Let me start and then I'll hand it over to Mike to go into more detail. With respect to the confidence that we have and the The way we want you to think about this is not that we have a pessimistic view on the rate of market growth that we're going to see going forward. We felt that there was some skepticism about our ability to achieve those targets.

Speaker 2

What we have provided you is a path where The 23 number we've articulated and the 25 number we've articulated, the vast majority of the step from here to there is within our control. It's the cost actions we're taking. It's the benefits of technology transformation. It's the assumption of a modest market growth of only 1.5 Points per quarter sequentially, which given that the industry is still much, much smaller than it was in 2019, We think it's a very conservative assumption. And then a realistic view on the opportunity to capitalize on the growth strategies ahead of So we have a very high degree of confidence in our ability to deliver these numbers.

Speaker 2

What we also showed you is that should the market grow at a faster rate of growth, Which we actually believe is a probable outcome. There's upside to the targets we provided today, but we wanted you to we wanted the targets that we provide to be as hardwired Possible, as durable as possible as Mike articulated. So we feel very good about the path forward and our ability to achieve the numbers we've articulated today.

Speaker 3

Okay. And so as I think about what are some of the pieces that will bridge from 2023 to 2024? And we're not providing specific 2024 Guidance on this call today, but I'll walk you through some pieces that hopefully help. So as you think through the cost actions that we are taking and announcing here today, That we expect to generate $100,000,000 in year in 2023. The annualization of that will generate Another $100,000,000 next year.

Speaker 3

So that would drive a step up in EBITDA improvement. The other piece that I would think about is on our tech transformation. We continue to make meaningful progress. As we've talked about our bubble costs, at the inception, we had indicated that it would the total cost Bubble cost would be give or take $400,000,000 As you look from 2023 to 2024, we do expect some decline in bubble cost to the tune of Going from about $100,000,000 to closer to $75,000,000 in 2024. And at the same time, we're going to have a much A substantial portion of our hosting volume on Google Cloud.

Speaker 3

And when you look at the cost of the hosting volume on Google Cloud, It's running about 35% of what, it costs to support those volumes pre tech transformation. So we expect to continue to get benefit there. At the same time, we are continuing to see industry volumes increase Separate from our own actions. And so we would expect benefit from industry volume growth. But more importantly, as Curt has mentioned and emphasized, Within our strategic growth initiatives, we would expect those to continue to be meaningful contributors from 2023 to 2024.

Speaker 3

And that comes from things such as Hospitality Solutions, growth in our GDS business, continued growth in payments. So We would see a meaning we would see and expect to see a meaningful step up from 2023 to 2024, but we're not providing specifics at this time.

Speaker 4

Got it. And then just overall on the industry, I think capacity this year is probably down, Call it like mid single digits versus where it was 2019 and there's obviously the distribution bookings are lagging. Is that being entirely driven by just business travel or I guess is there anything that could happen in terms of capacity Business travel that could cause sort of the 3rd party distribution bookings to sort of Accelerate or get closer back to 2019 levels or is there something structural that's allowing the airlines just to control a lot more of that direct traffic?

Speaker 2

Thank you. Yes. What you've seen great question Jed. What you've seen to date is, the portion of the industry that has recovered Or growing most quickly is domestic point to point leisure type travel. And that's effectively fully recovered In North America, for example, a little bit slower in some other parts of the world, where there has been a lag and what constitutes such a significant portion of the GDS Part of the industry is number 1, corporate travel number 2 is long haul international.

Speaker 2

Corporate travel is recovered if you look at TMC and corporate About 80% of where it was in 2019, international long haul is south of that number. And so Asia Pacific still has not fully recovered based on The slowness in China, etcetera. And so what we expect going forward is as the industry grows, capacity continues to come back, We believe the opportunity for corporate travel and international long haul to grow at a faster rate than direct distribution Should support above market growth in the GDS sector. We do not believe that there's been anything structural that has changed With the exception that those portions I articulated have recovered relatively more slowly, again, in leisure and domestic point to point.

Speaker 3

Yes. And I think it's important as we look at what perspective volumes could be to really look at our airline partners because ultimately They provide really good signals as to what the direction can and maybe. And so for example, if we look at The airline industry today, what we're seeing is historically high airfares that are generally running 20% to 30% above pre pandemic levels. And at the same time, despite those high airfares, we're seeing record high load factors on planes. And you're hearing the airlines talk about record revenue quarters and you're hearing our airline partners talk about their desire to significantly add capacity.

Speaker 3

Now in the short run, capacity has been constrained in the airline space. One, there's been difficulty on the labor side, Primarily simply by training pilots quickly enough and identifying and hiring pilots or a good wave of retirements during the pandemic. And with the resumption of growth, airlines have been working through that. That's probably going to take some time. At the same time, on the aircraft side, Boeing and Airbus had slowed production during the pandemic and airlines had set down a lot of planes.

Speaker 3

Now they're working to both bring those planes back and working with their airline manufacturers to bring on and accelerate deliveries as best they can, But capacity has been constrained on the airline side in a significant way and airlines are working through those capacity constraints They're signaling that they're going to be able to add strong capacity in coming quarters. And so that gives us optimism in terms of overall volume growth because we would expect Good portion of that to accrue to the GDSs.

Speaker 2

Yes. And I'll just say, I hope and expect that the rate of GDS marketplace growth Is on the higher end of what we provided today, so is within that dotted line additional opportunity. We believe the hard line we have provided Is the very low or conservative end of what may happen?

Speaker 4

Thank you.

Operator

Thank you. And our next question coming from the line of Dan Westfielik with Morningstar. Your line is open.

Speaker 6

Good morning, guys. Thanks for taking my question. I guess just one here. What are you guys hearing from corporations on their travel budgets and plans for the Q2 and I guess the rest of 2023 in the current macro environment. And has there been any shift, I guess, To those budgets and plans versus maybe 3 months ago.

Speaker 6

Thanks.

Speaker 2

Thank you. Again, we've seen Corporate travel overall is trading at about 80% of where it was pre pandemic today. We're seeing corporate travel grow on a quarterly basis Similar to the other trend lines I've indicated, which is 1% to 2% quarter on quarter seasonally adjusted and that's been the trend for the past few quarters. We did see that pick up a bit in January and then the growth rate leveled off a bit. So what we're hearing and this is a series of anecdotes rather than hard data Is that, people are getting back on the road, external travel is happening en mass, meetings and events are back to normal.

Speaker 2

And actually the amount of internal corporate travel is probably greater given the work from anywhere dynamic in many corporations. I know there was a question last quarter and there's a theme of, well, there were layoffs in certain sectors, for example, tech, will that impinge travel? If you use employment as a proxy and you look at the size of the tech firms, most of them actually grew their employment dramatically from 2019 to 2022. And even with the reductions that they've put in, they still have many more employees today than they did back in 2019, presuming that they still are engaged in commerce and Seeing each other, we're actually quite bullish on the long term trends for the corporate travel sector. So overall, I think we hear good signs.

Speaker 2

Again, we're not going to prognosticate whether the rate of growth is going to continue to be 1% to 2% We'll accelerate to be 4% per quarter for example, but we believe there's a lot of growth upside in corporate travel for the long term.

Speaker 6

Okay. Thanks for that added color.

Operator

Thank you. And our next question coming from the line of Victor Chang with Bank of America. Your line is open.

Speaker 7

Good morning. Thanks for taking my questions. A couple if I may. Maybe first of all on Slide 8 where you showed share gains with the top 25 agencies. How much of that is driven by faster recovery from big deal to Sabre's mix, maybe be it by region or by corporate versus leisure?

Speaker 7

And maybe if you can provide us some more color on what you're seeing in Q2 bookings year to date? And then I have some more follow ups.

Speaker 2

Victor, thank you. This is Kurt. On share gains, what we're seeing is, It's a combination of improved share of wallet with our existing clientele as well as the conversion of new wins. And so there's a good degree of that which is the improvement in same store sales. What I can tell you is that we're seeing that performance Pretty universally, both geographically and by market segment.

Speaker 2

In Q2, what we've seen Is a similar trend to what we saw in the Q1, which is GDS market growth up between 1% 2% over Q1, Which is a similar trend to what we've seen in the past two quarters.

Speaker 7

Thank you. That's very clear. And Maybe 2 more on NDC. I know you've talked about NDC Unit Economics earlier, but overall what we're hearing is, I know It doesn't once there is no one size fits all, but overall what we're hearing is NDC booking fees are generally lower when we compare it to the Eddyfact channels.

Speaker 8

Not sure if

Speaker 7

you can provide some more color on that. And then can you talk a bit specifically about maybe the America move to NDC in Q2? And should we expect some impact from there?

Speaker 2

Thanks, Victor. First of all, on economics for NDC, As I have stated here and previously, the economics are discrete carrier by carrier. There is no one size fits all. We have agreements where the economics are neutral between Edifact and NDC and where they're different between Edifact and NDC. As I indicated earlier, With the increased adoption, we do expect in forward years of NDC coupled with the growth strategies we've articulated, we expect to be unit margin positive in the future.

Speaker 2

With respect to American, we successfully launched NDC with American in early April. It was a big accomplishment for the both of us. And I would tell you that American views it as a very successful launch just driven by their public and their private comments. And the relationship between American and Sabre has never been in a better place.

Operator

Thank you. And our next question coming from the line of Alex Irvin with Bernstein, your line is open.

Speaker 8

Hi, good morning gentlemen. 2 if

Speaker 7

I may please. First on the cost restructuring, Could

Speaker 8

you please provide some detail on which functions you're applying to reduce spending on and how we can gain confidence that that won't impair the ability of the business to compete? My second question is follow-up on the last question regarding the booking flow following the partial contract withdrawal from Edifact by America Inc. 2. How do your own bookings look with American sort of quarter to date please?

Speaker 2

If you can share that. Thanks. Yes. Let me take a bit of this and then give it to Mike. On the restructuring question, first of all, I wanted to share, we're very proud of the history of Sabre and who we've been and what we've done in the marketplace.

Speaker 2

What we did is as we sat down as a management team is we look forward at where the business is today, the state of the marketplace And what we believe the opportunities are to bring value to our customers and new customers around the world. And so what we've done is designed the organization and the resource pool Against that set of opportunities that we see in front of us. So with that, let me let Mike talk in a bit more detail about what we're doing there.

Speaker 3

Sure. So as we approached our resource realignment, there's a couple of things that we prioritized within that to Really drive our business going forward. So first, ensuring that we are resourcing In the very best way possible, our tech transformation. 2nd, ensuring and supporting the growth initiatives that we've outlined today. And 3rd, supporting our customer commitments.

Speaker 3

Now with that, as we looked at the rest of the organization with those Ares really being Ares of focus. We went through our org and looked at what is the right org design for what we want as we move forward. We evaluated things like spans and layers and how much resources we're applying to various aspects of our business. We evaluated our real estate footprint. And so all of those were targeted to really develop a lower fixed cost structure That is more efficient, but at the same time focusing the resources we have on that which is going to drive revenue, that which is going to drive EBITDA and ultimately growth for our business.

Speaker 2

And with respect to American NDC, let me reiterate without speaking about the details of any specific customer. NDC remains a low single digit percentage of airline intermediary bookings. That's true for the industry as well as for Sabre. We've had a very successful launch with American and we've seen nothing structural change in the nature of the marketplace with that or other NDC launches.

Operator

Thank you. And I'm seeing no further questions in queue at this time. I will now turn the call back over to Mr. Eckert for any closing remarks.

Speaker 2

Thank you again for joining us this morning. We appreciate all of your interest in Sabre and look forward to speaking with you again soon. That completes today's call.

Operator

Ladies and gentlemen, that doesn't call our conference for today. Thank you for your participation. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Sabre Q1 2023
00:00 / 00:00