Sabre Corporation (SABR) Earnings Call Transcript & Summary

Great. Let's get started. My name is Josh Baer. I am a software analyst at Morgan Stanley. We have here the Sabre team. We have CFO, Doug Barnett; and the IR team, Jennifer and Kevin. A quick disclosure. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures or at the registration desk.

Thank you for joining us. For those investors who might be newer to the Sabre story, hoping you could start off and maybe just talk about some of the major dilutions and how you're positioned within the travel industry?

Sure. Sure. We like to say, at Sabre, we make travel happen. So basically, we have really what we might call 3 lines of business. The largest part of our business is a global distribution system. Basically what that is, is an aggregation where we take airline content and make it available to travel agencies and other TMCs and OTAs and allow them to shop. So think of it that way, just connecting the offer content from the airlines along with the people who purchase it on travelers' behalf. And that's the largest part of our business. That's what we call our TN business. The second largest piece of our business is the Airline Solutions piece. Basically, that enables airlines to do reservations, check-ins and those types of things. And then we also have other technology that enables it to do revenue management, without going into too much more detail, and then operations management, crew management, things like that. And then the last and smallest part of our business is our Hospitality Solutions business. That is where we're the leader in core reservation systems. We have over 40,000 properties around the globe that are on our reservation system. We also have a limited service PMS system, property management system. And then now -- and we're in the process of building out a full-service PMS. So those are the primary offerings of the company.

Great. That's a great background. And I'd like to dig into each of those different areas of the business. But first, I wanted to address what's most topical probably COVID-19, coronavirus. I know you put out some guidance ranges for Q1 for the impact. The question is, how should investors think about the impact more broadly? If there's any color you can give on the segments impacted? Or how you're thinking about managing coronavirus?

Yes. So let me walk you through basically what we've seen so far. So the global distribution system, I'll break it up into the 4 regions. In 2019, the only -- the GDS -- the first time that the GDS business hadn't grown in some time. It was down about 2%. North America is where we have 55% share, was actually up as a very strong market. The other 3 geographies, EMEA, Asia Pacific and Latin America, were down slightly for different reasons. When we came into 2020, we saw that trend continue in the first couple of weeks because that's when coronavirus virus wasn't really being talked about. Once coronavirus started getting more traction, we immediately saw the airline bookings -- okay, so that went -- people who aren't that familiar, that's when people purchase tickets. We saw that drop by almost 40% in Asia Pacific, begin to soften a little bit in Latin America and EMEA. And at that point in time, North America was still growing slightly. We've now seen all the regions get a little bit softer, all right? Which, obviously, the biggest impact from a regional standpoint, still being in Asia Pacific as well as now is in Europe. So the guidance that we gave is what happens, we tracked and we can see what's happening even on a weekly basis from global bookings. So we released earnings on the 26th. Those we look through towards the end of February, we saw that on -- globally, GDS bookings were down in the mid-teens. So the guidance we gave, because it's -- we don't have any really ability to forecast beyond that. We don't know what's going to happen, if it gets better, gets worse, or whatnot. So the guidance we gave for the first quarter was what would happen if that mid-teens decline in bookings continued through the balance of the entire quarter or even got a little bit worse, instead of being down mid-teens, was, let's say, down 20%. So that was the guidance we gave that said revenues could be down $100 million to $150 million. And then we give the corresponding earnings impact on that. The closest thing that we have to it, as a point of reference, would be SARS back in 2003. That's probably the closest thing that I can think of to compare it to. And in SARS, which actually, when it first became more of an epidemic that was talked about, the timing actually was very similar to what we've seen with the COVID-19 situation, which is the first quarter was down mid-teens, the second quarter was down mid-teens. By then, it began to abate, and the GDS market wasn't down as much. It recovered a little bit in Q3, was a little bit better in Q4. But on total, on total, for 2003, the global GDS bookings were down 9%. So what we're doing is, obviously, we'll continue to monitor it. We're doing all the prudent things you'd expect us to do, putting tight cost controls on the company while looking at vendor agreements, doing all the things that we do to manage our costs. And obviously, just managing the impact of what that's having on our customer base as well because obviously, our customers are being exposed to this as well as we are. So staying on top of it. We'll just have to see how it plays out. One question we do get is, do we think it's structural? Obviously, not. I mean, we saw out of 2003 was once you got into 2004, the market balance righted back up. The global GDS market was up 6% the next year. So gives you sense of that travel will come back ultimately.

That's very helpful. The one follow-up I have is most of that discussion was around GDS bookings. Should investors expect a lagged impact on the solutions side of the business as far as passengers boarded?

Yes. So it's a good question, and you probably should. Because eventually, right now, what you're seeing if people are booking flights now, and it's down, they're not going to actually board the planes out in the future. So we believe there probably will be some corresponding softness in the Airline Solutions business because that's when we get revenue when people board planes, and there might be some corresponding, a little bit of softness in the hotel side of our business because, obviously, we need people to book hotel rooms and go to those hotel rooms and stay. So could be some continuing follow-on. A little bit of softness.

Good. So one of the most interesting pieces of news in 2020 that's definitely been overshadowed is the partnership with Google, so I wanted to ask a couple of questions there. Can you walk us through some of the most important points of the partnership, both from the technology side, but also on the collaborative innovation?

Sure. So I want to make sure we use that word, Google partnership, because that's really what it is. It's not a cloud deal. It's -- we were very specific when we went into trying to select a vendor for a long period of time that it was a partnership arrangement. So I'll walk through the dynamics of it. Obviously, it is a traditional -- a cloud arrangement, where the economics on that deal were superior to what we're offered by the other vendors. The second piece would be, we wanted to pick a partner that could help us with our tech transformation. So Google has agreed to provide resources and technology to help us on our tech transformation. And just as a point of reference to that, they recently bought Cornerstone, which is a consulting team that has done mainframe offloads, and they'll be at our disposal to help us as well. Then the other thing we looked at right now, a lot of our hosting costs are on the mainframe, and it's -- and we have a long-term contract with DXC. That contract expires in 2023. One of the things we were looking for was a backdrop to that contract, to backstop that contract, meaning that if we do need mainframe services beyond '23, we would look to Google to be the provider. So that was a key point for us because we want to make sure, if we needed mainframe and cloud computing services going forward, we had -- we turned to 1 vendor, not to 2. Then we move into what, Joshua, you alluded to, which there's an innovation agreement that we entered into. We call it innovation partnership with Google. We will work together to bring out tools that enhance the travel industry and will be revenue-generating for both parties. The other thing we'll be doing is working with Google with their AI and machine learning capabilities to also search for more revenue opportunities. And then lastly, the thing that's critical that I want to make sure everyone understands is that excluding the cloud piece, all right, all the other things I just talked about are exclusive to us. They cannot do those other services with any other GDS providers. They, of course, can provide cloud services, but they can't do the innovation framework, they can't help somebody do a technology transformation and whatnot. Those are unique and exclusive of the partnership arrangement we have with Google. So it provides us with a lot of comfort. And obviously, we're a key customer now for Google. And we -- they do not want to see us fail in our tech transformation. So it was a critical partnership, and we think transformative as we move forward in the industry.

That's very clear. So more broadly, on the tech transformation, if you could give a high-level update of where you are today? What's in the cloud? And what are some of the challenges that you face moving off mainframe or in this transaction?

Yes. So as you can imagine that previous to any type of move from the cloud though, all of our technology was in an old technology, a TPF, 40-plus year old technology on a mainframe. We had already started to move some -- migrate some things to the cloud, such as right now, all of our shopping is in the cloud environment and other things have been moved as well. But the bulk of -- still a lot of our most difficult technology stuff that we have is still on that mainframe. So we need to get off the mainframe for a number of reasons. Obviously, everyone understands the advantages of moving to the cloud: faster speed, better security, more -- easier maintenance costs. We can scale a lot faster and more economically. So it's cheaper. It will enable us to use more common APIs and develop technology much quicker. We'll be able to get customers to migrate much faster than they would if they were on the mainframe. So there's clear advantages to -- obviously, to do it. So we had started already to try and move things, and we did run into some issues with regarding to some of the stuff we tried to move. And it's part --it's a 40-year-old technology, it's hard to move. So we've started moving some, had to move it back. But now, as we move forward, we'll have Google as a partner. So I think we'll have more tools at our disposal to be able to do tech transformation. So I feel very strong that it'll be successful, and it'll be much better doing it with a partner like Google than trying to do it on our own.

Got it. And you recently announced incremental investments, in part, supporting the technology transformation and the way you framed it was splitting $150 million into mainframe, cloud and strategic initiatives, and I do want to spend a good portion of time digging into the strategic initiatives. But for investors, can you help -- like we have that breakdown of 50, 50, 50, but where is the spend actually going? Is it for infrastructure? Is it for Google Services? Are you hiring? Is R&D headcount increasing? If you can give any color on that.

So let me break it down, and then we'll get to that. So let's break it down to the mainframe, cloud and then I'll let you talk about strategic investments. With regards to mainframe. Those are costs we thought as we move things off of the mainframe onto the cloud environment, the spend we have for the mainframe hosting cost would go down, all right? Obviously, since we tried to move some stuff and had to move it back, those are just incremental costs that we're bearing that we hoped we wouldn't bear. And those are being paid to third-party providers. They're not people. It's mainly to DXC. If we go to the cloud, there's a situation where it's kind of a combination of a couple of things. One, standing up cloud environments, waiting to receive the stuff that we had planned to move as well as we had planned on optimizing our cloud environments. Obviously, once -- most of our cloud environments right now are on AWS. So once we decided that we're going to move to Google and select Google as our partner, we put all optimization efforts on hold. So right now, we're bearing kind of the bubble costs of that, not optimizing and also setting up cloud environments that hasn't received things yet. What we'll have going forward now is also some of those bubble costs will continue as we move things off of AWS on to Google. So the bubble costs will continue into 2021 as well. And I do expect, for the sake of these, to assume that the $50 million incremental that we hadn't spent with DXC that, that will continue into 2021 as well. Now if we go over to the part -- the incremental investments that are strategic. Those are primarily being spent on things such as a full-service PMS, which I'll talk about a little, I'm sure you're going to ask me about the Accor deal. Low-cost carrier asset that we acquired in the fall called Radixx as well as investments and new offer and obviously, a little bit more investment in NDC. And then lastly, we need to invest in some of our internal systems to build and meet some of the new demands of our customer base to support the tech transformation. So those investments significantly expand our total addressable market by almost $5 billion. So these are really -- we've got a -- the other 2 I separate out and say, we've got to spend this money. We've got to do the tech transformation. Yes, it's going to cost us a little bit more than we expected, but we've got to get off the mainframe. These are to definitely expand our addressable market.

And so on the strategic side, is it more of a headcount?

That would be more headcount investment. That's correct. So both the other prior -- the prior ones, which are third-party vendors, this one, you're absolutely correct, will be new R&D hires and skill sets.

Okay, great. So maybe we'll go through the different reporting segments. And as we address each one, we'll touch on the strategic initiatives that are in each. So first, with Travel Network, I mean, I'll just ask a question on GDS share, which has been increasing, I think, for 8 straight quarters.

That's correct.

What are some of the drivers behind those share increases? And is it sustainable?

Yes. So you're absolutely right. It's been basically 8 straight quarters in a row with share gain. And what's really driving this technology? What we're finding is our agencies are looking for who can meet our technological needs. So when we roll out such things, the Sabre Red 360, our new desktop agency tool that can get agents up and efficient and understand how to do bookings as quickly as possible and make their whole operations more efficient, that's a tool that's helping us. As I mentioned, we have all of our shopping right now that we moved to the cloud. So that obviously helps with speed. So I'd say that the share gains have been on the backdrop of technology. And I think that will continue to be the case because, as you know, it's -- there's 3 players in the marketplace. And right now, 2 of us can really invest in those types of tools and 1 of us can't. So I think they'll -- we do expect there to be continued share gain on the GDS side.

Great. And so the strategic initiative that aligns with Travel Network, I think, is NDC. Could you frame that opportunity for investors? Maybe touch on where we are? What pieces you have in place? Where the investments are?

Yes. So if I -- first describe what NDC is. NDC is really kind of a structural framework that enables the airlines to more efficiently, communicate their offerings or their content to their distribution networks. Think of it as a pipeline to where you're trying to get customized offers out to the marketplace, whether it's direct or indirect channel. Quite candidly, we're at the early stages of NDC. There aren't that many NDC bookings being done right now. Each airline is kind of adopting their own strategy right now. So I'd say that the whole NDC framework is kind of in flux. However, I do think -- let's talk about what I believe is the real opportunity, and that's where we're also investing, it is a new offer because new offer would then tie in to NDC, which is the airlines are looking for ways to drive revenue and how do they grow their revenue base. And probably the easiest and most logical way for them to do it is to start moving into what we would call personalized offers to the travelers. So if you think about right now, everybody in this room when they travel, there's not a personalized offer that's given to you even though they do have that information. They know whether or not you like to board early, they know whether or not you like an aisle seat or a window seat. They do know whether or not you order a meal. They do know whether or not you want Wi-Fi, lounge access or whatnot. So eventually, the way to drive value is become more personalized to the traveler. And then -- and obviously, that then has got to be -- that's a retail piece, got to be distributed, whether it's done both through a direct or indirect channel and, obviously, then to the end customer and fulfilled. So we believe that the value eventually will be in that offer creation because that will enable more revenue generation for our airline customers then have, obviously, a bigger market for us.

So in its -- under NDC, like one question that I get from investors is, does the role of the GDS change in kind of some of these future ways that you're addressing them?

Yes, we think it -- actually NDC helps the GDS. And the reason why is if you just think about what I just described, if you want to get into personalized offer, the traveler you're more mainly going to be targeting is more likely the business traveler than the leisure traveler because they're the ones who have the funds that will look for things like what I just described. And where -- and obviously, those bookings are vastly growing through travel management companies. We have 80% share of the travel management companies in North America. And those are the high-value travelers for the airlines. They're the ones who ultimately will benefit and probably spend on those personalized offers. And where do they get that content? Through the GDS. So actually, we embraced NDC. We support it. We have -- we continue to support it, and think it will only help the GDS, not hurt it.

Excellent. So moving on to Airline Solutions. The strategic initiative in there, I think, is around low-cost carriers, your acquisition of Radixx. If you could maybe talk about the importance of addressing the low-cost carrier, where some of the investments going?

Sure. So we -- right now, low-cost carries constitute almost 30% of the travel marketplace, and we really did not have an asset that addressed that space. SabreSonic, which is our PSS system, was too robust and too expensive really for that marketplace. So we wanted to enter that space, and Radixx was a great acquisition for us. First, it expands our marketplace, obviously, and that let's just plan a space that the fastest-growing, it's growing 2 to 2.5x what the full-service carriers are. Even more importantly, a lot of the creativity and the whole kind of revenue generation ideas that first come to market come out of the LCCs. So if you think about baggage fees first arose out of LCCs. It didn't start with full-service carriers. So strategically, it's important for us to be close to that marketplace to be abreast of what's happening from a revenue opportunity standpoint. So not only an open marketplace, but also us to understand what's happening with regards to revenue opportunities. And the other thing we see with it is there's no reason why we shouldn't be able to take some of our other assets that we talked about, both the operations side and the revenue generation side and tie those in the LCC and expand that down into the LCC space, offer a full-service offering to the LCC, and not just a PSS. So strategic, and we think a nice opportunity for us going forward.

Great. And the other question I wanted to ask in Airline Solutions is, I guess, the history is you've been through a pretty heavy renewal period, successfully locking up some of your Airline Solutions customers, and the opportunity is to go after and win some share from competition. Is that still kind of the right way to think about what the opportunity is?

Yes, it is. So let me walk you through what you -- Josh, what you alluded to. So really in the '17, '18 area, we spent a lot of effort basically renewing the vast majority of our Airline Solutions customers. So during that time period, we renewed 75% of our Airline Solution revenues that would go out to 2023. So I would say, back then, the way we've kind of awarded is we were kind of playing defense trying to renew our own customer base and secure our revenue streams going forward. As we transition into 2019 and on to '20, we can go more on the offensive because actually, our competitor has more passengers boarded or more opportunities up for renewal now than we do, roughly $600 million. And of those, about 2/3 of them are their high-end product, Altea, and 1/3 of it is Navitaire. And the space that more likely than not that we'd be able to pursue would be if you're on the lower end product, and you've now grown and outgrown that, you need to upgrade, and you need to move to more of a full-service PSS system and not be on the lower end service. And we have more experience right now than our competitor does in moving people off of their low-end product to their high-end product. So that's the sweet spot right there. And that -- of the $600 million, roughly 2/3 are Altea that's up, and 1/3 is Navitaire. So it's really the 1/3 that we can go on offense now and trying to pursue.

And is there any way to frame the time horizon or like point to any progress in going after that?

I can tell you, we're having good discussions. Think of it as -- of the 600 million PBs, maybe as I told you about, it's roughly 200 million PBs. We believe we were not in for it all then we'd win 200 million, but we do think there's an opportunity to win some share in that space. So still a lot of progress being made, and a little more news to come later.

Great. And so the last area is around hospitality. I guess, the strategic initiative there is on developing a full-service PMS. So taking a step back, if -- I think, if you could highlight some of the key points to the core agreement and what having a full-service PMS is for you?

Yes. So first, let me just quickly break up the hotel space. The hotel space's break as -- would be what we call enterprise, the large chains that you're used to thinking about, more of the community space, mid-range number of properties and then we call the low end of the long tail. Our sweet spot has been in the community space. We have almost 50% market share in that space. We do have 1 large enterprise customer, which is the largest implementation of a customer reservation system called Wyndham. They have over 8,000, 9,000 properties that are on our CRS system. One of the -- so for us to really grow, since we have such a dominating position in the community hotel space, would be to move and win more enterprise customers. When we went and talked to that customer base, they acknowledge the great CRS system that we had. Most of them have homegrown systems, but said, look, what really would be more important to us is that -- because you could come with us was not only a CRS system, but also a full-service property management system as well. So really the property management system is things that are going to manage everything else on the property, meaning whether they have a golf course, a spa, restaurant, valet parking and all that kind of stuff. That's where it's managing. And so we have a limited service PMS, but not a full-service PMS. So what's great about the Accor deal is that, first and foremost, it's another enterprise win, a large property of -- win on the CRS side. They have roughly 5,000 properties. So between now and 2022, we'll migrate over to our CRS system. So this will be our second major enterprise customer that's on our customer reservation system. They will begin to also roll out our limited service PMS to some of their properties beginning in 2022 and beyond. And then they will work with us together to develop, on top of the limited service PMS platform, a full-service PMS product. And it will be a customer -- it will be market-facing, okay, PMS system, not a customized Accor system. So now, we can go back and talk to some of those other enterprise customers before that said, "Hey, come talk to us if you're going to have a full-service PMS." So it probably expands our addressable market by over $1 billion. Some of you may know, there's, right now, most of the people in that space have either property -- a product that's owned by Oracle that has been right now isn't being invested in. So one, once we get the full-service PMS, we'll be able to come with a unified platform for CRS and our full-service PMS and also, we'll be able to go back to our community customers with a full-service PSF because some of those will want that product as well. So it greatly expands our addressable market. So a key strategic win for the Hospitality Solutions business.

It sounds like it's both an upsell opportunity within your existing customer base and something that could potentially help to land new enterprise.

Absolutely.

And how should investors think about -- obviously, this was just announced, and it's going to take several years to develop.

Right. Yes. So the full-service PMS probably will not be in the marketplace until probably late 2023, more likely 2024. So it's going to take that long to develop it. But what we will be able to do is now go and talk to some of those other enterprise hoteliers and talk about the development of the full-service PMS. And so there should be some opportunities, they have some other wins now between now, and at the time it's fully rolled out, because people have a sense of what's coming.

Great. So maybe I'll ask one more and then there might be time for a question in the audience. So we've covered -- I think we covered all the strategic areas and all the segments. So with these investments in mind, what gives you the confidence that these increased investments today will -- that you'll see the return on those investments longer term? Does that come from accelerated or better growth on the top line? Or is it eventually better margins from some of the technology?

So let's talk about the technology transformation first. That will be -- primarily, we're looking at that as a cost driver, okay, to lower our cost structure. So what should happen is we'll have a little bit of elevated total tech spend in 2020, 2021, that should begin to roll over as we move into 2022 and continue to decline as a percentage of revenues and give margin expansion going out through 2024. That's when we talked about the 26-plus percent EBITDA margins in '24 and beyond. If you take a look at the revenue investments, just -- I gave an example of what will happen with just the Accor piece. Remember, the problem -- the only problem they have is those wins take a while to come actually into revenue. So I mean, even though we've won Accor now, just think it's going to take until '22 to ramp. So most of the revenue benefits from the investments that we're making on primarily full-service PMS will come probably beyond 2022 and 2023. However, some of the investments that we're making to bring the LCC -- the product, Radixx, up to greater scale and greater stability, that should, again, probably -- they're easier to ramp than full-service -- than the big, large PSS systems is that should begin to generate revenue out in 2021 and beyond.

Excellent. I think with that, we're actually out of time. So really appreciate it. I think this was a very helpful conversation. Thank you.

Okay. Thank you.