Business Breakdowns
· Ben Needham
So could that be 50% uplift, could that be a 100% uplift in the next five to 10 years? Potentially they deserve to share that value creation with their customer. And then there's the market share dynamic. If you track the distribution business and the air IT business over time, they've constantly taken market share from their nearest competitors. That can give another 1%, 1.5% to 2% to the top line. I take all that together. Air traffic at 3% to 4%, inflation that gets you to 5% to 6%. Revenue per passenger in air IT can get you another couple of percent, that can get you 7% to 8% and then market share I think can get you to 8% to 9%. I think it's a high single digit top line business and within that distribution should remain pretty tepid, keep growing at 4% to 5% grow volumes a little bit less than air traffic volumes but with a little bit of price and then hotel IT because it's a lot more embryonic and they're currently got Marriott, Accor, Ascott Limited migrating onto their platforms in the next year and a half to two years and that business should grow at 15% to 20% probably for the next couple of years. There's a lot of growth opportunity ahead of it.
· Matt Reustle
[00:00:00] S0: Based on my own personal experiences and the amount of altercations that I see on my social media feed happening at airports dealing with the inventory systems, it certainly seems like that's an area that these airlines could benefit from upgrading. What does the timeline look like for something like that and from an execution perspective, where does the confidence lie in their ability to execute on doing that efficiently? Is there a time in history that they've done things like this where the execution has been on par with what's needed?
· Ben Needham
[00:00:00] S1: I think they've executed very well. Amadeus go about their business quietly, but brilliantly, and very effectively from a capital allocation point of view, we really admire that. If an airline's going to enter an air IT contract, they take it seriously because this is the central nervous system of their business. Managing the inventory, managing the reservation systems, managing the departure control systems that needs to be done properly and revenue's everything for these companies. Managing that effectively is just key. So the RFP processes take a long time, that can take years to get across the line. The reference contracts that they have on the Nevio side of the proposition, they're gonna be really key. Listening to what British Airways say and Finnair say on that Nevio proposition, they're already wired up to it and how it's actually benefiting the revenue per booking over time. That's gonna be key. Obviously the industry will listen to those companies and then you could get a snowball effect because you get FOMO and it's commercially potentially gonna really help these companies who are early adopters. It can take a long time but I think it's a bit of push in terms of Amadeus selling the proposition properly to the airline customers and a bit of pull, they'll see actually some of the early benefits of those companies who are tapped into Nevio and then you can see a big growth phase play out. Altea has already been through this, their original passenger service system that snowballed and scaled from the early 2000s. Even to today, people are still actually signing up to their Altea proposition, which is their passenger service system but the more legacy system that airlines hooked onto, and they've done a great job of that and that's why they've got to over 50% market share within the air IT space. Just the final point to note is balance sheet considerations are really key when airlines are negotiating with air technology companies. If you are very levered and if you're losing market share in an RFP process, that's a problem. It's an oligopoly within air IT, but the number two player, it's pretty levered.
· Matt Reustle
[00:00:00] S0: Mission critical things like those systems require some thinking around the financial positioning of your counterparties. Taking it down a level on the margin side of things, I have some understanding they are a network business connecting different parties here. What does that look like from a margin perspective? Where have they ranged historically? I know there's differences between the segments but at a consolidated level and to the extent that the nuances to each segment is relevant, what would you point to there?
· Ben Needham
[00:00:00] S1: The gross margins are very attractive. They're mid-seventies and they've been pretty consistent every time, which is remarkable really given how embryonic the hotel IT business is within that. They've been scaling that business for 10 years. There's been some dilution there from the scaling of that hotel IT business. EBITDA margins are in the high 20s that touch 30% a few times. When you are processing an incremental booking for Lufthansa or Air France or processing an incremental booking on the distribution side of the business, the incremental cost is next to nothing. The business is very scalable that affords nice economics within the business. They reinvest that when they are scaling and when there is growth and volume with the airlines that will reinvest it. And so if you look at their R&D spend over time, the R&D to sales has actually reached new highs more recently. Currently at the 22% level, which is very high. If you look back 15 to 20 years ago that was actually 10%. They've been investing in their Nevio proposition in their IT, they've been investing in NDC within the distribution business, there's a Microsoft partnership, there's been a re-platform of the business to make it cloud enabled, enable them to sell native products where the costs are gonna be dramatically improved because of that. Despite all of that and despite an embryonic hotel IT business, they're still almost making peak margins at the 30% level. The financial model is a good one and it's worth just noting as well. The cash conversion is good, so they have a negative working capital balance. They do capitalize customer implementation, so when they're doing a big IT project, if they're installing Nevio or installing their hotel IT proposition with the various customers they take on that cost themselves, then they capitalize that cost. They make up for it when the room bookings or the airline bookings come through on a 10 to 15 year view, which is a nice thing for the value chain in that you're only actually spending once bookings are happening, you are not actually spending the money as a hotel provider on that transition. That's also why you need to be well capitalized and that is a big differentiator of them versus their competition.
· Matt Reustle
[00:00:00] S0: I kind of bucket R&D into capital allocation in a similar vein to CapEx, but what do they do with excess capital in terms of distributions? How do you think about them beyond some of the operational needs from a capital allocation standpoint?