Another assessment from Morningstar, with a bit more detail into their assumptions of SaaS metrics.
Stock Pitch: SiteMinder
An underestimated future category leader.
Roy van Keulen
Market struggles to see a clear path to profitability
The company’s lack of profitability as a listed company, despite an unusually supportive backdrop in recent years, is weighing on the shares.
Our Take
SiteMinder (ASX:SDR) is coming off a heavy investment cycle and has launched more substantively new products than any other company within our Australian technology coverage. The products are unique in the market, and we expect them to be highly appealing as they allow hotels to attract significant incremental demand, with limited incremental expense or effort. We believe these products will differentiate the company’s offering and allow it to pull away from competitors. We think this is likely to result in strong secular growth that will outweigh any cyclical softness in travel spending.
We see a clear path to profitability
- SiteMinder has invested to develop several new products: Channels Plus for demand aggregation, Dynamic Revenue Plus for pricing optimization, and Smart Distribution for inventory management.
- These products are unique in the market, driving differentiation and growth. Current R&D spending therefore doesn’t reflect baseline spending as it is not needed to stay up to date with competitors. Although we expect ongoing investment in absolute terms, we expect it to moderate as a share of revenue.
- We see SiteMinder’s new products as highly appealing to customers as they unlock incremental demand at little incremental expense or effort. They do this by putting the hotel inventory in front of more eyeballs, allowing them to access a larger pool of demand. These products should provide a new growth engine once launched in fiscal 2025.
- We expect SiteMinder’s new, unique products will improve conversion of prospects and deliver higher average revenue per user, or ARPU, thereby lowering customer acquisition costs, or CAC, per customer and increasing value per customer.
- We expect the new products to drive more business for hotels, which improves hotel unit economics and lowers business failure rates, thereby increasing the lifetime of these higher-value customers.
MARKET CONCERNS
Falling travel demand would reaccelerate losses and cash burn
A normalization of travel spending, or a travel recession, directly flows through to lower revenue. This is as transaction revenue primarily consists of payments revenue, which is a fixed percentage of booking value flowing through the platform.
Falling travel demand will also lead to higher business failure rates, and therefore churn, among SiteMinder’s small- and medium-size hotelier customers. This is a headwind for subscription revenue.
INVESTMENT THESIS
SiteMinder is a SaaS company, not a consumer cyclical company …
We think margins will be much more resilient than the market gives this company credit for. Operating deleverage from a potential downturn in travel demand is less severe than the company’s 70/30 revenue mix would suggest or example, if transactions were to decline by 10% with a 10% decline in travel demand, such as in a severe recession, this would only result in a 2% decline in gross profit for the group. This excludes any impact on subscription revenue, which we expect to be more stable.
Research and development spending is currently elevated
SiteMinder has launched significant new, unique products
- Channels Plus: Allows hotels to connect to dozens of second-tier online travel agencies, or OTAs, with a single connection. This unlocks significant new demand for hotels with minimal incremental cost or effort on the part of the hotel.
- Dynamic Revenue Plus: Allows hotels to automatically adjust room rates to optimize for conversion and yield, which boosts profitability.
- Smart Distribution: Allows first-tier OTAs to add more, and higher quality, inventory to their platforms.
- All three products are unique in the market and benefit from SiteMinder’s unique assets, such as its relations with OTAs, its large customer base, and its proprietary data assets.
SiteMinder is out-innovating other channel managers by a factor of 5
- SiteMinder is the only Tier 1 channel manager in the world, with around twice as many customers and twice as much revenue as Tier 2 channel managers, its closest competitors.
- SiteMinder’s scale allows it to fractionalize costs over a larger customer base, especially fixed costs for integrations with OTAs and existing products. We expect SiteMinder has at least 5 times the resources available for product innovation. Given the industry is early in its digitization journey, we expect high returns on these investments. We see scope for many more processes to be digitized and automated, like OTA marketing campaign management or loyalty programs.
R&D investment has produced compelling new products …
- Hotels operate in a competitive industry with low barriers to entry, resulting in low margins and high business failure rates. This means SiteMinder, and competitors, constantly need to replenish their customer base. It also means hotels should be highly receptive to solutions that help improve their odds of survival, such as SiteMinder’s new products.
- Connecting to OTAs is costly, resulting in hotels typically only connecting to a handful of OTAs.Channels Plus allows hotels to access around 15% of incremental gross booking value, or GBV, with minimal effort. This will mostly fall through to hotel profits given the high fixed costs within hotel businesses. For new SiteMinder customers, Channels Plus is enabled automatically, which should help adoption for SiteMinder and hotels.
- Using SiteMinder’s proprietary data assets, we expect Dynamic Revenue Plus will eventually enable hotels to improve the yield on their rooms by around 15%. This additional revenue is highly profitable for the hotels, given their high fixed costs, and represents a valuable revenue stream for SiteMinder to monetize.
Exhibit 1: New products will drive secular growth …
Sources: Company filings, Morningstar Equity Research. Data as of Nov. 30, 2024.
… Leading to secular growth and improving sales and marketing efficiency
- We expect SiteMinder’s new products to drive immediate benefits from higher conversion thus lowering customer acquisition costs, or CAC.
- In the medium term, as a larger share of SiteMinder’s customers start using the new products, we expect higher ARPU. We also expect lower customer churn due to decreased business failure rates because the products make hotels more profitable. Both help significantly lift lifetime customer value, or LTV.
- Lower CAC, higher value per customer, and longer average customer lifetimes are likely to make SiteMinder’s sales and marketing efficiency world-leading relative to peers. As a corollary, it means sales and marketing as a share of revenue can come down significantly.
Exhibit 2: … And boost sales and marketing efficiency
Sources: Company filings, Morningstar Equity Research. Data as of Nov. 30, 2024.
New products to drive growth and a clear path to profitability
As SiteMinder comes off its heavy research and development investment cycle, we expect the company to start generating strong returns from its investments into new products. We expect this to result in strong and efficient revenue growth, as new products improve conversion and retention, allowing for sales and marketing to come down as a share of revenue. We expect R&D investment to remain relatively fixed. We expect any cyclical downturn to have only a limited impact, given the long secular growth trajectory.
