Sabre Q3 2024 Earnings Call Transcript

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October 31, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Sabre Third Quarter 2024 Earnings Conference Call. My name is Rifka, and I will be your operator. As a reminder, please note that today's call is being recorded. I will now turn the call over to the Senior Vice President, Investor Relations and Treasurer, Brian Evans. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. Welcome to Sabre's Q3 2024 earnings call. This morning, we issued an earnings press release, which is 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 growth strategies, share growth and distribution volumes, results of our technology transformation, commercial and strategic arrangements, and our financial guidance and targets, free cash flow 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 Form 10 Q for the quarter ended September 30, 2024. Throughout today's call, we will also be presenting certain non GAAP financial measures.

Speaker 1

References during today's call to adjusted EBITDA, adjusted EBITDA margin 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 Eckert, President and CEO and Mike Randolphi, 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 turn the call over to Kurt.

Speaker 2

Thank you, Brian. Hello everyone and thank you for joining today's presentation. I'm pleased to share that the Sabre team delivered significant commercial, operational and financial achievements in the Q3. Earlier today, we reported 3rd quarter results that highlight the progress we are making toward our key strategic and financial priorities. We delivered steady year on year revenue growth, a significant increase in adjusted EBITDA, continued margin expansion and positive free cash flow.

Speaker 2

We are on track to more than double adjusted EBITDA from 2023 to 2025, supported by the continued execution of our growth strategies, a strong focus on cost management and the realization of cost savings objectives tied to our technology transformation. I commend our team members around the world for their commitment to innovation and their dedication to our customers. Turning to Slide 4, you can see an overview of the topics that Mike and I will cover this morning. First, I will review our Q3 business highlights, including our financial performance. Then I will provide an overview of the progress that we have made on our growth strategies.

Speaker 2

Finally, Mike will take you through our Q3 financial results and discuss our updated 2024 guidance. Please turn to slide 5. Sabre delivered solid improvement across key financial metrics in the Q3. Revenue expansion was driven by an acceleration in the growth rate of air distribution bookings, high single digit growth in hotel distribution bookings, an increase in average booking fees and continued hospitality solutions growth. Our top line performance combined with effective cost management led to a 19% increase in adjusted EBITDA compared to the same quarter last year.

Speaker 2

Turning to Slide 6. During the quarter, we made significant progress on each of our key strategic priorities, which as a reminder are to generate positive free cash flow, deliver sustainable growth, drive innovation and enhance our value propositions, and reduce our cost base while repositioning resources toward growth. We will discuss many of these achievements throughout today's presentation. Turning to Slide 7. Travel Solutions delivered steady financial progress in the 3rd quarter, driven by solid growth in both air and hotel distribution bookings, higher average booking fees, and continued expansion of air distribution share.

Speaker 2

Sabre's air distribution bookings grew by greater than 3% year on year, outperforming the industry. Roughly half of this came from share expansion and the balance for market growth. Specifically, this acceleration in air bookings growth was fueled by the implementation of commercial wins, continued growth in corporate travel, and an improvement in Asia Group bookings. Looking forward, we expect our year on year air distribution bookings growth to continue building momentum as we enter 2025, driven primarily by the progress we're making on our growth initiatives. On to slide 8.

Speaker 2

As we've emphasized throughout 2024, we have consistently grown our share of air distribution bookings. This chart shows that our share has expanded for the 7th consecutive quarter on a year on year basis. We are seeing positive trends in the air distribution business, particularly in corporate travel where we hold a leading position. Sabre's corporate volumes grew between 3% 4% in the quarter. We will shortly talk about specific commercial wins that are driving these results, and we expect to achieve further air distribution industry share gains from our strong commercial pipeline and contract wins that have yet to be implemented.

Speaker 2

Turning to Slide 9. Hospitality Solutions revenue increased to $84,000,000 a 7% year on year improvement, representing the highest quarterly revenue in segment history. The increase was driven by higher overall customer deployments, continued growth in CRS transactions, and a favorable mix within our customer base. Strong revenue growth contributed to a 67% improvement in our adjusted EBITDA to $11,000,000 with the business expected to continue building momentum in the quarters to come. Our Hyatt implementation remains on track.

Speaker 2

Prospectively, we expect both double digit transaction and revenue growth and we expect to achieve our full year adjusted EBITDA target of nearly $40,000,000 in 20.24 nearly $70,000,000 in 2025. Please turn to Slide 10. During Q3, we continued to invest aggressively in our 6 growth strategies and I'm pleased to share with you the progress we have made starting with Sabre Mosaic. Please turn to Slide 11. Sabre Mosaic is designed over time to replace and modernize traditional PSS systems.

Speaker 2

This AI powered technology platform designed to modernize travel retailing is open, modular and flexible, enabling intelligent and personalized offers and orders that extend beyond seat and fare class to include a wide variety of additional ancillary and third party service options. The graphic on the left of this slide provides an overview of the Sabre Mosaic product suites. Our PSS agnostic approach, which means that this is architected to work with both Sabre and non Sabre PSS platforms, gives each airline customer the ability to choose the solutions that fit its needs. Feedback from airlines and industry experts has been overwhelmingly positive. We believe Sabre Mosaic is the most advanced offer in order technology platform available in production to the global airline ecosystem.

Speaker 2

On to Slide 12. We are already translating this early enthusiasm for Sabre Mosaic into commercial partnerships. Virgin Australia, one of the global airline industry's leading digital innovators, has selected our platform to modernize its retailing capabilities and will adopt Sabre Mosaic's full technology stack. Additionally, Riyadh Air, Saudi Arabia's newest flight carrier, has selected Sabre Mosaic to power its offer optimization technology and retailing capabilities. On to Slide 13.

Speaker 2

Turning to our other growth strategies, we continue to build out our multi source platform, which seamlessly offers NDC, low cost carrier and traditional Edifact content with intelligent algorithms and efficient workflow integration. We are now in production with an early adopter program connecting content from over 40 new LCCs to approximately 150 agencies with a broader rollout expected in the coming quarters. Additionally, we have NDC integrations with 23 airlines currently live in the GDS. We also recently expanded relationships with Delta, WestJet and Tapair Portugal to include NDC content. On distribution expansion, as I mentioned earlier, we achieved additional industry share gains.

Speaker 2

We recently announced a commercial agreement with World Travel Inc, a leading regional TMC and one of the North American agency wins we referred to last quarter. We continue to sign new business and are implementing previously announced agency wins and we have a very rich pipeline. Accordingly, we believe we are well positioned to achieve at least 100 basis points of share gains on an annualized basis by the end of 2024 and annually for the foreseeable future. Hotel distribution experienced strong growth in the Q3 with bookings up 9% year on year and our hotel attachment rate relative to air bookings increased approximately 2 percentage points year on year. We believe there is significant opportunity ahead to drive strong growth in hotel distribution.

Speaker 2

In our Confirma digital payments business, we realized significant contract wins including Priceline, a leading OTA and Furlong Fox, the largest corporate travel agency in Argentina. These wins and continued growth in virtual card deployments support our belief that our payments business will deliver meaningful long term revenue growth. Within IT Solutions, in addition to the progress with Sabre Mosaic, we signed and implemented an important agreement with Air Serbia, establishing Sabre as its NDC IT provider. Last, as mentioned earlier, we are gaining momentum in the Hospitality Solutions business. CRS renewals stand above 90% and we are driving strong growth in SynXis retailing, where adoption has doubled since the beginning of the year.

Speaker 2

In summary, we remain focused on these strategies and are building a strong foundation for long term sustainable growth. I will now hand the call over to Mike to walk you through our financial performance and forward outlook.

Speaker 3

Thanks, Kurt, and good morning, everyone. Please turn to Slide 14. We achieved a number of important financial objectives in the 3rd quarter. As you can see, we generated year on year revenue growth and delivered solid cost management that resulted in higher margins and strong flow through to the bottom line. Adjusted EBITDA in the 3rd quarter was meaningfully higher year on year and we generated positive free cash flow, which is a key strategic priority as we focus on improving our capital structure and deleveraging the balance sheet.

Speaker 3

We delivered these strong financial results while supporting investment in our 6 growth strategies, which we believe will drive sustainable top line and bottom line growth. Please turn to Slide 15. We achieved solid year on year improvement across our key financial metrics. And as you can see in the table, these results are roughly in line with our expectations. The $10,000,000 difference between our revenue guide of $775,000,000 and actual revenue of $765,000,000 is attributable to some small differences across various revenue streams versus our internal expectations.

Speaker 3

Based on early indicators, we see these factors carrying into the 4th quarter that are reflected in our updated guidance. Turning to Slide 16. Total 3rd quarter revenue was $765,000,000 an increase of $24,000,000 or 3% versus last year. Distribution revenue totaled $551,000,000 a $26,000,000 or a 5% increase compared to $525,000,000 in Q3 2023. Our total distribution bookings were $93,000,000 in the quarter, a 4% increase compared to $89,000,000 in Q3 2023.

Speaker 3

And our average booking fee was $5.94 in the 3rd quarter, up 1% from Q3 2023. Notably, our air distribution bookings year on year growth rate demonstrated meaningful acceleration this quarter as compared to prior quarters. IT Solutions revenue totaled $140,000,000 in the quarter. This was a $7,000,000 decline versus revenue of $147,000,000 in the prior year, primarily driven by previously disclosed demigrations. Hospitality Solutions Q3 twenty twenty four revenue increased 7 percent or $5,000,000 to $84,000,000 Adjusted EBITDA in the 3rd quarter was $11,000,000 an improvement of $4,000,000 versus prior year.

Speaker 3

This represents the strongest quarterly adjusted EBITDA for the segment in 5 years. And as Curt mentioned earlier, we expect accelerating revenue and CRS transaction growth in Hospitality Solutions and believe we are on track to achieve our full year adjusted EBITDA target of nearly $40,000,000 in 2024. Sabre's adjusted EBITDA of $131,000,000 in Q3 2024 versus $110,000,000 in Q3 2023 represented a $20,000,000 improvement year on year. Lower unit costs from our technology transformation and strong cost discipline helped drive our adjusted EBITDA margin from 15% in Q3 2023 to 17% in the Q3 this year. Lastly, we generated free cash flow of $8,000,000 in the quarter and ended with a cash balance of $690,000,000 Turning to Slide 17.

Speaker 3

Regarding guidance for the Q4, we expect revenue of approximately $715,000,000 and adjusted EBITDA of approximately $115,000,000 We expect to generate greater than $80,000,000 of free cash flow in the 4th quarter and expect to be positive for the full year 2024. As a reminder, the 4th quarter is typically the lightest quarter for air distribution bookings, but the strongest quarter for free cash flow generation due to favorable seasonality in working capital. For the full year 2024, we now expect revenue of approximately $3,030,100,000 and adjusted EBITDA of approximately $515,000,000 As we exit 2024, we have strong momentum in a number of our important business drivers and believe we are on track to achieve our 2025 targets of greater than $700,000,000 in adjusted EBITDA and greater than $200,000,000 in free cash flow. Turning to Slide 18. We believe the path we are pursuing has the potential to create significant long term shareholder value.

Speaker 3

The target investments we are making in our 6 Growth strategies, coupled with prudent cost management have driven and we expect will continue to drive meaningful increases in adjusted EBITDA and free cash flow. We believe our anticipated earnings improvement has the potential to increase enterprise value over the long term. As we prioritize utilizing expected free cash flow to pay down debt, we believe debt over time will comprise a smaller proportion and equity a larger proportion of our enterprise value further enhancing shareholder value. And with that, operator, please open the line for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from the line of Josh Bair of Morgan Stanley. Your line is now open.

Speaker 4

Great. Thank you for the question. I guess, want to dig in maybe to the revenue and sort of talking about small differences across several lines. I mean, hoping to get a little more color for the revenue miss versus the guidance there? And then, I mean, what I'm looking at like IT Solutions growth down after growing last quarter, just wondering, even though like passengers boarded was flat, like last quarter you had passengers boarded down, but that segment still grew.

Speaker 4

So, maybe we can start there with overall revenue and IT Solutions dynamics.

Speaker 3

Yes. Thanks for the question. What I would say in terms of our revenue differences versus the $775,000,000 there's no discernible trend or anything really notable specifically to call out versus our internal expectations. It really was an aggregation of what I'd call some very small differences. For example, our air distribution bookings fell short of our internal expectations by 200,000 bookings on a $79,000,000 base.

Speaker 3

And so that's $1,200,000 of the $10,000,000 difference. And there's an aggregation, I'd say, of small differences like that, that's summed to $10,000,000 Now with regards to IT Solutions, we've talked about in prior quarters, IT Solutions was generally in line with where we expected. We expected it to be as we've talked about in prior quarters, roughly in the $140,000,000 to $145,000,000 range this year. And that's about where we're landing. And with regard to year over year, there was some in period revenue last year associated with demigrated carriers, not attributable to PBs that didn't necessarily repeat this year.

Speaker 3

Now as we look forward, a couple of things that I would say with regards to Airline IT specifically, as we've talked about, we believe we've stabilized that business. We think the baseline at this stage is in that $140,000,000 to $145,000,000 range on a quarterly basis. But what I would say is as we are now getting past the impact of demigrated the demigrations, 2 things will happen. You'll start to see the benefit of PB growth come through. But the other thing is, as we've noted, we've had significant commercial wins over the last several quarters.

Speaker 3

And as far as it goes with Airline IT, that goes to Mosaic. You saw Virgin Australia announced the full offer order suite and working with us on that. You see Riyadh on the offer side. And so what I'd say is, as you look at the next few quarters going forward, we're probably in the $140,000,000 to $145,000,000 range. But at some point during 2025, I expect it to start to inflect up meaningfully and start to see more growth in that revenue stream.

Speaker 4

Great. That is helpful. And then the other topic just wanted to ask about is free cash flow. You have EBITDA up considerably year over year. CapEx is about the same, I think.

Speaker 4

Just hoping you could talk about some of the moving pieces in working capital and the delta between the trajectory of EBITDA that we've seen this quarter and so far this year and free cash flow? And what gives you confidence in getting to the positive mark for the full year like basically the big Q4? Thanks.

Speaker 3

Yes. First, I would just highlight Q4 is typically our seasonally strongest free cash flow. And so what we see in terms of Q4 is aligned with our EBITDA, our working capital and the trends that we're seeing. So it does give us a high degree of confidence. Now I'd remind you, if you go back and you replayed the earnings calls from last year, last year we had generated about $150,000,000 one time benefit from our working capital initiatives off the balance sheet.

Speaker 3

So now we are lapping that. And so you don't get that same benefit this year. So those are the big differences year over year. But as we move forward, I would say, and we go into 2025, like I said, for 2024, we expect to be breakeven. We expect to generate greater than $80,000,000 in the Q4 of this year.

Speaker 3

And next year, we feel very, very much on track with our target of greater than $200,000,000 next year.

Speaker 5

Great, thanks.

Operator

One moment for our next question. Our next question comes from the line of Jed Kelly of Oppenheimer and Company. Your line is now open.

Speaker 6

Hey, great. Thanks for taking my question. I said in your prepared remarks that air distribution is building momentum into 2025. Should we expect like a slight reacceleration in that segment going into next year in order to hit that guidance? And then can you just talk about the overall travel environment, where we are, where you think we stand going into the next year?

Speaker 6

Thanks.

Speaker 3

Yes. With regard to air distribution bookings first, thanks, Jed. And with regards to air distribution bookings, what I would remind you is over the last few months, you've heard Sabre announced significant commercial wins. World Travel, we announced another one of the largest domestic agencies that hasn't been announced. Interpark Triple, a new agency win last quarter in Spain and France.

Speaker 3

We've had significant progress on NDC. So my point on all that is, is those are recently agreed to agreements. We do not yet have the benefit of most of that in our air distribution bookings. So with that, what I would say and I'm not going to go too much into 2025 on this call, I'm going to save that for February. But what I would say is, we feel very confident, very, very confident that as we move into 2025, you're going to see the benefit of those agreements that we've reached and you're going to see a meaningful acceleration from share gains in our air distribution bookings.

Speaker 3

Yes. With respect to

Speaker 2

the environment, Jed, obviously there's been sort of mixed macroeconomic news globally. Demand both in corporate and leisure remains pretty strong across all geographies. We're not seeing any real meaningful downward pressure. There obviously are some supply constraints on air. That's not meaningfully impacting our business, just a very small impact.

Speaker 6

Got it. And then just as a follow-up, just with the new wins, it kind of looks like if we look at it, cost of revenue is about, call it, 57.5 percent of distribution revenue. Are these new wins? Are they more high volume where they might put a little bit of pressure on the gross margins? Can you just talk about that dynamic?

Speaker 6

Thank you.

Speaker 3

Yes. Thanks for that, Jed. As I mentioned, the new wins that we've seen are largely not yet in our air distribution bookings and largely not yet in our results. What I would say as you look at gross margin over time or look at cost of revenue give or take around the 40% range, what I would say as we move forward, I would expect that gross margin would likely remain around 60% and cost of revenue would likely remain around 40%. Now if you look at quarter by quarter, it gets lumpy because there's different types of incentives that get paid from time to time and different thresholds to get hit.

Speaker 3

If I look at the prior two quarters, we had revenue growing faster than cost of revenue. And so I think you have to look at this over an extended period of time. But what I would say is if you if I were to foreshadow, I would expect us to still have a cost of revenue of roughly around 40% as we move forward over the longer term. Thank you.

Operator

Our next question comes from the line of Victor Chang of Bank of America. Your line is now open.

Speaker 5

Hi, morning. Thanks for taking my questions. A couple, if I may. Can you maybe give us some color as well on how you guide to Q4 with a bit of a lower revenue growth? And the bookings performance Q4 to date, I think there seems to be a Turkish and frontier loss.

Speaker 5

And with regards to that, is there any specific reason? Is it down to unfavorable economic terms and some of the rationale around that? And then I have more follow ups.

Speaker 3

Sure.

Speaker 2

Yes. Thank you, Victor. With respect to Q4 and booking trends so far, I would say what we're seeing are trends that are relatively consistent with what we reported for Q3, nothing substantially different. As we look at Turkish and content generally, we obviously did not reach agreement on mutually beneficial terms with Turkish. And therefore, as you indicated, we don't have the content of Turkish currently.

Speaker 2

As we've said previously, we went to great lengths in our discussion with Turkish to reach a new agreement for both traditional and NDC content. We're disappointed that they were unwilling to consider terms that would allow us to meet the needs of the ecosystem, travel agencies, etcetera, to compete fairly for their business. And so we regret the challenges that this brings to the ecosystem. That said, we believe that the fully integrated breadth and depth of travel content that we have brings immense value to all parties in the ecosystem. And we hope to reach agreement with Turkish in the near future.

Speaker 2

I would mention that Turkish is a carrier with a relatively smaller home market. So the value of the distribution we bring, we feel is tremendous. But we feel very good about our competitive position overall.

Speaker 5

Very clear. And maybe if we talk about revenue per booking, it seems to be they're still growing, but a bit slower than previously. Should we expect normalized kind of revenue per booking going forward? Any kind of implications or impact from pricing and mix or NDC going forward? And maybe last question is with regards to 2025 outlook.

Speaker 5

Obviously, you talk about confident on over $700,000,000 EBITDA in 2025. But I guess if I look at the bridge that you had in kind of last year, and now we're experiencing some GDS volume growth, I guess that will bring you maybe closer to $750,000,000 or $800,000,000 depending on the share gains you have. With that bridge, is that still a realistic goal?

Speaker 3

So, yes, on the average booking fee, I'll start with that. So if you look at if you move forward just sequentially, you look at the Q4, I would expect in the Q4 for your average booking fee to tick back over $6 And there's a couple of things there. First, there's a small portion of revenue and distribution that's actually somewhat fixed. And seasonally, you generate less bookings in the Q4. So that obviously helps create a little bit of an upward trend seasonally.

Speaker 3

The second thing is, which is also tends to be a seasonal impact, you have a lot fewer Asia Group bookings that tend to have lower booking fees. So as I look to Q4, I would expect that the average booking fee would be comfortably over $6 As I look forward beyond that, I would say that I'd expect our average booking fee without getting into too much detail on 2025 to be in that $6 range. Now with that being said, with regard to our 2025 outlook, I would remind you on our February earnings call, we broke out our bridge for 2025. And we highlighted from 2023 to 2025, we would generate around $250,000,000 of cost efficiency, partly from our tech transformation as well as other cost initiatives and $115,000,000 of strategic from our growth strategies. As we look at 2025, as I've articulated, we feel very confident that we're on track for greater than $700,000,000 of adjusted EBITDA and greater than $200,000,000 on free cash flow.

Speaker 3

I would highlight that the commercial wins we have are part of our 6 growth strategies that Kurt has articulated, and that's included in that $115,000,000 of strategic growth initiatives that we've outlined. Now, I would also highlight that our baseline assumption separate from our growth initiatives is for flat to moderate industry air bookings growth. Should that prove to be more favorable, as we've articulated, each point is worth about $13,000,000 to adjusted EBITDA. So we think there's certainly potential to do better than $700,000,000 but at this stage, I would say we're very much on track toward our $700,000,000 goal.

Operator

This concludes the question and answer session. I would now like to turn it back over to Mr. Kurt Ecker for closing remarks.

Speaker 2

Thank you very much, operator. First of all, I'd like to have a moment of silence on behalf of my New York Yankees. Tough game last night. Seriously, we're happy with the progress we're making. As Mike indicated, we feel very much on track for the strategic transformation of Sabre, and we look forward to continuing to talk to you in future quarters about this.

Speaker 2

So thank you, and happy Halloween.

Operator

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

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