Sabre Holdings switches CEOs, appointing Tom Klein [UPDATED, ANALYSIS]
Sabre Holdings, the travel technology giant, said today that company president Tom Klein is succeeding Sam Gilliland as chief executive officer.
The decision was announced abruptly. Yesterday Gilliland was scheduled to talk with reporters, as part of a press campaign the company was about to launch, in an abruptly canceled event.
UPDATE Noon ET: Says spokesperson Nancy St Pierre:
“The transition in CEO leadership from Sam to Tom has been a carefully orchestrated succession process, led by Sam.”
Klein, who was appointed president three years ago as part of what appears to be a smooth transition, will remain president, while Gilliland will continue to serve on the board of directors of the Texas-based company, which generated $3.1 billion in revenue last year.
Commenting on this transition, Gilliland said, in a statement:
“It has been a privilege to lead Sabre’s outstanding team of more than 10,000 technology and business professionals over the past 10 years as CEO.
Together, we have diversified our business and made crucial investments to stay at the leading edge of technology for the travel industry.
Tom Klein has been my partner in that endeavor and I can think of no one better suited to take our company forward.”
— Tom Klein (@tomkleintk) August 15, 2013
A legacy of cutting costs and attempting to diversify the company
Gilliland started in 1988 as a software developer and had a meteoric rise, taking the corporation’s helm when he was merely about 40 years old.
During his tenure, Gilliland oversaw the tricky transition from a public to a privately held company.
He embarked on cost-cutting that allowed the company to trim its billion-dollar debt load. He led by example, such as giving up his office for a corner cubicle — letting his old office be transformed into another usability lab for the user experience teams.
The company has about $3.9 billion in senior secured and senior unsecured debt, according to ratings service Moody’s, for a debt leverage of about 5x to 6x, which is not-unheard of for investment-heavy information technology businesses, say analysts. That’s much lower amount than the $5.4 billion at the end of 2008, which was a worrisome ratio of 9x.
Diversifying in a quest for growth
The biggest changes during his tenure has been the shift from an emphasis from being a global distribution system (GDS) for airlines to providing end-to-end services for the hospitality industry, among other growing business lines.
“Sabre is the only travel technology provider in the US that’s positioned to capitalize on the convergence of marketing and distribution as well as the airline shift away from GDSs and towards CRS bookings.
The saving grace is there’s quite literally no one else in the US market that has this comprehensive offering of products and services.”
Within North America, Sabre faces competitors such as smaller players Micros, Agilsys, Pegasus, and other niche companies.
Beyond the GDS
People have been kissing global distribution system goodbye for so long that their lips must be chapped. Yet the dinosaurs haven’t perished from the face of the earth, as airlines and agents continue to find them useful–for a lack of viable alternative options.
Sabre’s GDS division rivals Amadeus‘s as the world’s largest. In recent years, Sabre has processed between roughly 35% and 40% of all airline tickets.
Need for a growth story
Yet the company’s owners, private equity firms Texas Pacific Group of Fort Worth and Silicon Valley’s Silver Lake Partners, are assumed by many insiders to be wanting to have a return on their investment, either through a private sale or a public offering.
Gilliland has been saying for years that it would like to go to market with an IPO at some point. Several analysts that Tnooz has spoken to this summer have said they expect the company to go to market within the next 12-to-18 months.
To prep for an IPO, Sabre needs to have a growth story, and the GDS tale is probably not enough of one on its own, say analysts Tnooz has spoken with this summer.
In 2011, the company generated $693 million in adjusted EBITA. That was a 5% adjusted EBITA CAGR relative to 2008, its first full year as a private company, when it generated $592 million in adjusted EBITA.
Given that its was recently able to refinance at about 5x to 6x leverage, Sabre’s adujsted EBITA today is probably at least $690 million, says Channana. If the EBITA were anything below that, the company would have probably struggled to refinance its debt — which it didn’t.
About one-fifth of that adjusted EBITA is probably derived from the airline and hotel solutions business, according to an analyst Tnooz spoke with, who requested anonymity. These divisions not only cater to airlines and hoteliers and enable them to process their customer data, but they also enable them to monetize that data more effectively.
Hospitality SaaS, as a star business
The company’s fastest growing division is Sabre Hospitality Solutions, which since 2009, under Gilliland’s championing, has successfully morphed from an entrepreneurial business to a fully scaled IT solutions provider.
The Software-as-a-Service (SaaS) businesses, with its reservations and property management system, marketing and distribution software, and Internet marketing and e-business solutions, is used by more than 18,000 hotel properties, says the company. It employs about 500, out of Sabre’s 10,000.
“Sabre has the promise of saying to a hotel owner, hey, we can give you CRS (SynXis, a central reservation system that’s direct, unlike a GDS model ); we can give you a PMS (SoftHotel, a web-based property management solution); we can use all of your property’s or chain’s customer data to help you design an effective website for converting customers who come directly to your site; we can give you multi-channel marketing and distribution of your real-time pricing and availability.
Sabre can then connect all of these dots, and make use of the transactional data that used to be just dumb data that hotels couldn’t make use of.
It can then take the treasure trove of data from their PMS and CRS and use it to help target similar cohorts for a hotel’s own online direct channel or even re-target existing customers more effectively.”
The goal is for Sabre would be to deliver multi-channel personalized marketing, taking the customer’s transactional data (which a hotel would otherwise lose under the old GDS model) and help the hotelier analyze and make use of that data.
Sabre could help a hotel do re-targeting of customers, mapping its customer data with data collected by third-parties to provide more effective marketing campaigns.
Other growth stories
Sabre’s GetThere business travel management unit says it has been winning clients as companies look for ways to cut travel spending. It is used by more than half the nation’s 100 largest travel programs.
Its 50-plus-employee Traveler Solutions department, which includes mobile-devices services such as TripCase, has also received plaudits. See Tnooz’s earlier article, “Why Sabre’s TripCase pivot may be strategic and lucrative in the long term.”
The corporation’s only other major division is Airline Solutions, which has plotted a steady course, as airlines have looked to outsource their passenger service system and other scheduling and ticketing software–with many international carriers signing on in the past three years, according to company press releases.
Travelocity’s apparent decline
Gilliland also oversaw the benign neglect of Travelocity, the online travel agency that once was the corporation’s shining star.
“Pro forma for the sale of Travelocity Business (Travelocity’s corporate travel agency) in June, I would estimate that Travelocity is now less than 10% of Sabre’s total revenues.”
So whereas Travelocity contributed $825.3 million to revenue in 2011, it’s now contributing less than $310 million, a figure disputed behind the scenes.
That’s roughly the same as it was contributing, not including the then-much-smaller corporate travel segment, in 2002, notes a former executive at the company, who spoke on the condition of anonymity.
“Sabre would have a tough time receiving its fair market value for Travelocity.
A competitor like Priceline or Expedia might look at it as a value play, meaning for getting the asset as cheap as possible, such as for the organic results that it still gets that it could be purchased.
But whatever low price they’d be willing to pay wouldn’t likely return enough to make the investors happy.
They clearly would have tried to sell it off by now, and if they haven’t it means its value is above its market clearing price.
I suspect Travelocity’s commissions are averaging around 13%, weaker than in the past.
Declining popularity for the OTA
Sabre Holdings doesn’t report traffic numbers for Travelocity, but third-party sources suggest the trend has been downward.
Back in May 2007, not long after Sabre Holdings went private, these were the rankings for unique visitors, according to Comscore, an analytics firm:
Expedia Inc.: 25,212,000
Orbitz Worldwide: 18,973,000
Priceline Inc: 8,691,000
Compare those rankings with May 2013:
Expedia Inc: 19,490,000
Priceline Inc: 16,871,000
Orbitz Worldwide: 9,119,000
When it comes to mobile unique visitors, the ranking order for the most recent period available, February 2013, is Expedia (at 9.9 million unique visitors), TripAdvisor (9,185,000), Priceline Inc. (7,608), Orbitz Worldwide (3,623), Kayak Network (3,230), and Travelocity (2,389). That’s not much better.
Besides traffic falling, Travelocity isn’t maximizing the traffic it has, either. Analyst Brian Nowak of Susquehanna Financial Group says:
“All signs point to its conversions likely being lower than its competitors’. If they don’t convert as at a high of a rate as Expedia and Priceline, they can’t bid as much as Expedia and Priceline on Google for paid ad search. So that compounds the user acquisition problem and their traffic problem.”
Tom Klein’s challenge
Klein has risen up the ranks as well, but has been in executive positions for nearly a decade, having been appointed group president of the Sabre Travel Network and Sabre Airline Solutions businesses in 2004.
It will be interesting to see Klein fill Gilliland’s shoes.
Gilliland was notable for having a non-flash persona in all the little details, from his folksy conference call style to his habit of personally driving himself to work in a modest Honda Pilot, and parking in the same lot as his employees.
No doubt many Sabre employees will be looking for subtle clues into changes in style and what they might mean during the coming months. Gilliland used to make musical recommendations occasionally when speaking to employees at company “town halls”–a humanizing touch that many staff members appreciated.
Some outsiders will be eager to see how quickly Klein can extricate the company from its legal battles with US Airways over distribution power and commissions.
For investors, there will be only one real concern, though: Can Klein deliver the earnings growth and revenue growth that will allow them to exit their investment in some way?
That’s a trick Gilliland was prevented from putting off, partly because of the US financial crisis.