Summary
- 4Q22 revenue was poor, and FY23 guidance is below expectations.
- SABR's tech transformation is progressing well, with expected savings of over $150 million per year by 2025 compared to 2019, and a significant reduction in computing costs in 4Q22.
- The risk-to-reward ratio for investing in SABR remains favorable with a low trading multiple and potential for significant gains if the company hits its FY25 guidance.
Thesis update
Sabre Corp. ( SABR ) missed revenue guidance and poor performance in 4Q22 are most unwelcome. The bull case for SABR assumes that the company will soon generate revenues comparable to those seen before the company's covid era, with margins that are significantly higher as a result of efficiencies and technological transformation and subsequently stronger EBITDA and free cash flow. Under the assumption of a low trading multiple, this would lead to substantial gains. For this to be successful, it is assumed that by the end of 2024, GDS will have gained market share, air travel would have returned, bookings fees would have increased due to an improved bookings mix, the cost of compute would have decreased, and savings would have resulted from the SABR technology transformation. The caveat is that investors must look past weaker-than-anticipated 2023 guidance and the possibility of macro impacts on travel demand. Given how the valuation is, it is evident that investors are not willing to look past it, yet.
My recommendation remains the same - to continue going long on SABR. It still one of the best risk-to-reward ratios in the current market environment with a near-term catalyst (post-COVID travel recovery). As mentioned, the valuation is undemanding today as market is not pricing SABR to hit FY25 guidance. If it does, the upside is significant.
Earnings update
SABR's $631 million in revenue was 6% lower than the consensus estimate of $673 million because of weaker-than-expected showings in IT solutions and distribution. In FY22, the total number of bookings was approximately 52% of the bookings made in 2019. This figure was lower than the estimated recovery rate of around 55% in Q3 and also below the minimum recovery rate projected by management for the year 2022. Due to slower-than-anticipated bookings and a predicted $100 million drag on IT Solutions revenue, SABR issued FY23 revenue guidance of $2.8 billion to $3 billion, or about 10% below consensus at the midpoint.
That said, SABR 4Q22 FCF of $22.3 million surpassed consensus expectations of $14 million. Nonetheless, because of seasonal influences and the payout of $60 million in annual incentive compensation, FCF is predicted to switch to negative in 1Q23, before becoming positive over the entire financial year. By 2Q23, FCF is anticipated to be supported by working capital efforts totaling $125 million and a $25 million gain from SABR's business expansion.
Management commentary on travel trend
The good news is that management is optimistic about the state of the industry so far in FY23. Early 2023 saw a reversal in the downward trend in travel that began in November and December due to airline operational issues, decreased business travel, and a slower-than-anticipated recovery in APAC. SBR TMC business is up 9% from December levels, and group bookings in Asia are back to their pre-Covid levels, so it appears that the industry is recovering from these negative trends. As aircraft deliveries pick up speed and operational constraints that slowed bookings in December are alleviated, I anticipate a further recovery in airline capacity.
Booking fees
There was an increase in average booking fees, up to $5.49 from $5.38 in the previous quarter. The average booking fee for the quarter was also up 11% from the previous quarter. Since Expedia ( EXPE ) has moved its lower-margin domestic leisure business away from the SABR GDS, I anticipate that SABR higher fees will be sustainable as long as corporate and international travel trends continue to improve.
Tech transformation
As mentioned before in my posts, SABR expects to save more than $150 million per year by 2025 vs 2019, thanks to the success of its technological initiatives, which will also improve products. In terms of progress, SABR completed its move out of Sabre-managed data centers and shut down more than 10,000 servers in FY22). In addition, in 4Q22, SABR increased its Google Cloud usage from 50% to 66%. In terms of cost, the average monthly unit cost of compute dropped by 8% in 4Q22 sequentially, and annual unit cost of compute finished FY22 at a 25% reduction from FY21. I take the progress (in cost) as a huge testament to this tech initiative ongoing in SABR. In my view, the advancements made so far are highly motivating since the management intends to conclude 2023 with 90% of computing operations conducted on the public cloud. Moreover, by the close of 2024, almost all of the computing volume is projected to be handled by Google Cloud.
Conclusion
In conclusion, while SABR missed revenue guidance and had a poor performance in 4Q22, the company's progress in its technological transformation and potential for a post-COVID travel recovery continue to make it a strong investment opportunity. Despite weaker-than-anticipated 2023 guidance and the possibility of macro impacts on travel demand, the risk-to-reward ratio for investing in SABR remains favorable. With a low trading multiple and potential for significant gains if the company hits its FY25 guidance, I recommend continuing to go long on SABR.
For further details see:
Sabre Corp. Q4 Earnings: Upside Still Significant If FY25 Targets Can Be Hit