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Sabre, the U.S. travel technology giant, has lost momentum.
Second-quarter revenue rose only 1.6 percent to $1 billion, the Southlake, Texas-based company reported on Thursday.
That figure represented a slowdown. In the same period a year ago, the company had a 9 percent growth rate. In 2015 and 2016, the company enjoyed double-digit annualized growth.
In the midst of this slowdown, Sabre is searching for more airline deals. The company’s flagship airline operations product is its passenger service system, SabreSonic. It needs to persuade airlines to switch to using that system away from others in the market, including the two offered by its arch rival Amadeus.
It is also retooling some of its other airline enterprise software tools to try to win back customers who had been turned off by them in the past.
It’s also looking for more buyers for its hotel technology, in particular of its recently debuted array of hotel property management services called Sabre Property Hub.
A Slower Pace of Growth
Sabre, famously a cash cow thanks to a high-margin business, is also throwing off less cash. In the second quarter, Sabre earned a net income of $27.8 million. That was notably less than the $92 million quarterly gain it generated in the same period a year earlier.
Cash provided by operating activities totaled $105.7 million in the quarter, down from $146.6 million in the same quarter a year earlier.
Sabre’s slower income was due to airline and hotel industry-level issues in each of its business segments. The company’s rising expenses were primarily due to increased technology expenses in the quarter as the company tries to overcome a perceived or actual research-and-development deficit.
Sabre appears to be playing a bit of a game of catchup in tech spending compared with Amadeus. The company continues to move its servers from slower and costlier mainframes to faster and more cost-effective public cloud storage. Employees are also adopting new processes for developing software in more agile ways.
Investors surprisingly took the long view. In early trading on Thursday, Sabre’s shares ticked up slightly after the earnings news.
Sabre’s largest business is in helping to distribute airline content to travel agencies. This unit eked out a 0.7 percent rise in revenue in the quarter to $724 million, year-over-year.
Compare that 0.7 percent figure to the faster growth in the period a year earlier, when the unit saw revenue rise 13.2 percent to $720 million, year-over-year.
During a Thursday call with analysts, Sabre CEO and president Sean Menke highlighted the brighter parts of the company’s picture.
The second quarter of 2019 saw an 8 percent rise in bookings via its distribution system in its home region of North America, Menke noted. But a loss of business in India masked that gain. In the past year, Jet Airways and Air India ran into financial upheaval. On Wednesday, Amadeus also reported a comparable downturn in business in the Indian market for the same reason.
Sabre’s distribution business faces slower airline capacity growth in key markets, said analysts at Goldman Sachs in a June report.
Some observers worried about long-term pressures on the distribution business.
Goldman analysts pointed to potential pressure on leisure travel bookings. Sabre’s biggest distribution partners are corporate travel agencies. But the company also helps leisure-focused online travel agencies like Expedia Group fulfill their online travel agency bookings. Expedia Group increasingly faces pressure from other players, such as Google’s metasearch offering that often sends customers to airlines directly for booking, Airbnb (if it enters the flights business as planned), and airline direct booking campaigns and technological investment. If airlines and hotels shift more share out of online agency channels, Sabre may lose, though players like Google and Airbnb may also hire Sabre to help handle some of their search technology needs.
In good news, Expedia Group didn’t report that as a significant trend yet in its earnings report last week.
Sabre noted more positive signs. It claimed the sixth consecutive quarter of strong gains in its global distribution market share, with a claimed 36 percent share of the worldwide market.
But critics said that share gain was more due the stumbling of Travelport, the third-largest distribution tech company after Amadeus. Travelport appears to have forsaken some share while it has been distracted by a private equity takeover.
Airline Tech Solutions
Sabre’s business of offering passenger service systems and related operational tools to airlines slowed, too, in the quarter, though not by as much as the core distribution business.
Airline Solutions revenue increased merely 3.4 percent to $211.8 million in the quarter. That was an improvement from the year-ago period when the division had seen a 2.4 percent contraction in its revenue.
In the quarter, revenue for its most important product, SabreSonic, declined 3 percent year-over-year. Management partly blamed the loss of two customers, Pakistan International Airlines and Philippine Airlines and a drop in ticket sales at American Airlines due to the removal of 737 Boeing Max aircraft for further inspections.
Management reported another sign of sluggishness. In the second quarter, about 180 million passengers boarded airlines using Sabre systems to process them, representing a 7.8 percent year-over-year decline.
“We would note that historical data suggests that growth in passengers boarded has been trending lower over the last several quarters,” said analysts at Goldman.
One reason: The company’s airline solutions unit has announced few new customers in the past two years.
During a call with analysts, management highlighted future opportunities. Executives said the company has been investing in its products. They said this would better place the company to steal market share. They noted hundreds of millions of dollars worth of contracts would come up for renewal in the coming years.
Management pointed to other positive signs. They noted a 15 percent increase in commercial and operations revenue in the quarter for its AirVision and AirCentre services, which executives said the company has recently enhanced with new tools.
Menke acknowledged to analysts that, among the “the health issues that we are having with the products” the biggest complaints from customers recently focused on its AirCentre product. Menke, a former airline executive himself, said Sabre has significantly improved the quality of its AirCentre tools for crew management and crew qualification.
Hotel Tech Solutions
Sabre’s hotel tech services business also seemed to be slowing, on average. The company’s hospitality tech business grew revenue 8.1 percent year-over-year in the quarter. But that was a slower pace than the double-digit annualized pace of 2018.
Management partly chalked up the decline in operating income for the division due to increased hiring to support future business growth.
But one contributing factor for the slowdown may be consolidation in the hotel industry, analysts at Goldman said. For example, the recent Marriott and Starwood merger of group brands has meant that there are fewer fat targets to sign up for software suites. Consolidation also enables hotel groups to negotiate more assertively on pricing in their contracts.
Another worry for some other analysts was the apparent lack of interest in new players like Airbnb in using Sabre’s technology and services.
Management accentuated the positive in its call with analysts. They said hoteliers are waking up to the complexity of handling their tech stacks. They said hoteliers would eventually realize it is more cost-effective to outsource parts of their enterprise software needs.
Sabre’s software for helping hoteliers manage individual property sales, such as its internet booking engine and its property management system, continued to draw new customers.
But some industry partners of Sabre have complained about the company’s product development strategy, which some accuse of being in disarray and prone to broken promises and missed deadlines.
Executives talked briefly about Sabre’s proposed purchase of Farelogix, an airline distribution technology specialist, for about $360 million. The deal, announced eight months ago, has been under review by the U.S. Department of Justice and by British regulators.
Menke said the company remained “passionate” about the deal and that he recently sent a letter to airline executives explaining the company’s good intentions with the agreement. Observers believe some executives at airline groups like American and Lufthansa have been lobbying to stall the merger.