These are my notes from viewing the video on the Sankar Narayan chat from 3 June 2022, earlier this week. Nothing new for those who follow SDR but it was quite a revelation for me and I bought into SDR that same day. I have some prior (dated!) cruise ship hotel and reservation system experience, so the solution and the need it is trying to address makes sound sense. Very comfy with Sankar running the ship and his approach/thinking. He clearly has skin in the game, and showed during the chat that he is similarly hurting from the share price fall ... If it can get through Covid, it can get through anything really.
Discl: Hold SDR IRL and SM. Will be further topping up if it dips further towards $3 as this feels like a really good entry point for a well-run business with many ways to win.
OVERVIEW OF BUSINESS
- Founded in 2006, listed on the ASX in 2021
- World leading provider of a SAAS hotel commerce platform - focus is on independent, small and medium sized hotels, smaller hotel chains
- Market data confirms that SDR has the largest platform in the independent hotel space
ADDRESSABLE MARKET
- Globally, approximately 1m hotels:
- Excludes China
- Large hotel chains have about 50k properties (of this 1m hotels)
- Excludes vacation rentals etc - this is a huge adjacency
- Majority of the hotels are small, medium sized hotels - very distributed
- Very fragmented in technology adoption - an evolving space, a lot of non-automated/manual hotels
- Large hotel chains have enterprise systems and revenue management systems which smaller hotels do not have
- Online travel agents take between 15-30% of margin for each booking - SDR has the capability to power the hotel’s own website to allow direct bookings, avoiding online travel agents - this increases the ability of a small hotel to self-distribute
TECHNOLOGY OFFERING
- SDR’s solution spans the end-to-end of a hotel operation - from Distribution, Booking Operations, Business Management/Operations and Business & Revenue Optimisation
- Connects to the most (1) travel agents and (2) hotel Property Management Systems (PMS) in the world - largest ecosystem of its kind
- Platform runs in 8 languages
- SDR’s platform sits between the Hotel and the Booking Engines - it is the connectivity of the hotel room inventory to the world
GLOBAL DISTRIBUTION FOOTPRINT
- Global go-to-market capability
- Offices around the world, sales people in 20 countries
- Not focused on China - mostly to connect Chinese tourists to outbound travel agents outside of China
REVENUE BREAKDOWN
- 80% of revenue is from outside Australia
- Fixed subscription revenue for software - bundles, customers pick and choose modules that they need - growth is mostly ex-Australia
- With the launching of the 3rd generation of the platform, focus has been on generating transaction activity-based revenue eg. Payments, bookings etc via products that were launched and scaled in the past 3 years - this has allowed SDR to participate in the post-Covid rebound - this is the next growth driver to ride on the scale of the transactions that goes through the platform - pre-Covid, 100m reservations with a value of $40b, went through the platform.
MULTIPLE OPPORTUNITIES FOR GROWTH
- Lots of confidence for opportunities to achieve sustained long-term growth
- More fixed price software to sell with lots of hotels to sell to
- Global go-to-market footprint to enable the sales
- Multi-lingual software
- More transaction-based products to increase utilisation of the software
- Upsell to existing customers - currently 32% of customers have only 1 product, mostly from recent Covid-period, transaction-based products - huge opportunity to upsell
COMPETITIVE LANDSCAPE
- Market data suggests SDR is 3x the nearest competitor from a scale perspective, in the small & medium and independent space
- SDR has lots of critical mass in the local markets in which it operates in
- The global footprint and scale of the platform is key, but what is key is SDR has enough size to be “local” in each of its markets - you cannot do this if you are small. This “local” approach enables local advertising, language translations etc
- SDR has also fine-tuned and matured its remote support and management capability well before Covid struck
STRONG FOCUS ON COST OF ACQUIRING CUSTOMER
- Clear focus that SDR needs to grow in a profitable way
- Every customer add must create Lifetime Value greater than cost of acquisition
- LTV/CAC, the ratio between Lifetime Value (LTV) and CAC (Cost of Acquiring Customer), is the “single most important metric” to track unit economics - super important to ensure building a valuable business for the future
- Retention is captured in the LVT/CAC metric, as is margin and revenue
- Pre-Covid, LTV/CAC was ~4x - this went down during Covid. Coming out of Covid,LTV/CAC is now around 3x and is heading back towards 4x from the focus to upsell and upgrade existing customers
RESILIENCE OF BUSINESS & UNDERLYING ECONOMIC MODEL
- Very pleased with resilience of the business, especially during Covid where the entire travel industry globally declined 60-70% in activity - from a cash flow perspective, SDR rode through the period by moving away from “investment phase to drive business growth”, to focusing on keeping operations going. Strong gross margins enabled this to occur
- Sales & marketing costs were taken down during the Covid period - now getting staff back onboard to sustainable long-term growth path as revenue ramps up. Once the cost hump to onboard and settle in the new sales staff is crossed and they gain experience, expect to see operating leverage come into in FY23-FY25. Expect t cash outflow as a % of revenue to moderate
- This playbook is similar to that of other SAAS companies and is not unique to SDR
- On R&D spend and focus, many projects were delivered in the last 6M. These were the result of difficult choices made during the pandemic where the decision was made to focus on developing new products - this has set SDR up for the next 3-5 years. As a result, technical expenditure as a % of revenue should start moderating.
- SDR has a global development footprint comprising (1) the Core technology Centre in Sydney (2) Manila development centre, which was opened in the middle of Covid in Sep 2020 (3) new technology centre in Poland - this has provided the option to balance the development effort across the geographic locations
- SDR has been able to attract and retain staff as (1) the technology stack is cutting edge (2) good work culture and (3) ability to learn.
BAILADOR RELATIONSHIP
- Sankar has a very long relationship with Bailador - he was on the Board previously
- Considers them to be great partners, value adding without day-to-day intervention in the business, seeks advice on the broader technology world and markets
APPROACH TO GROWTH
- Not a fan of inorganic M&A of the software platform - technical integration is messy, inconsistent user experience, migration challenges etc - all of these distract from innovation on the core platform itself as the focus will end up being on migration
- M&A only really makes sense to add features to the core platform - these opportunities will be typically small in scale and size
- Sankar reinforced the point several times - SDR is an organic growth play.
- The TAM is there, the platform has scale and there is a strong global sales and marketing engine to support the growth
THOUGHTS ON MACRO ISSUES AND IMPACT ON SDR
- During Covid, SDR management modelled the Covid impact on travel very extensively, what-if scenario’s etc - things have played out as they thought it would
- The approach has not been to pick one macro theme and then bank the company against that macro theme but rather to focus on how the company will perform over different macros themes
- The Covid performance showed how resilient the business was/is
- Management has determined that the biggest impact on SDR is the re-opening of travel - this was a major structural change. This single event trumps all other macro factors, in terms of impacts to SDR. Based on this, SDR does not spend too much time worrying about the macro issues as these macros impacts are 2nd or 3rd order of priority impacts vs the single event of travel re-opening.
WHAT KEEPS SANKAR AWAKE AT NIGHT
- Navigating Covid was a major worry
- Given the resilience of SDR throughout Covid, feeling very positive now vs during the IPO - at IPO, projects still needed to be delivered/addressed
- The plan as to how the business should evolve is actually playing out, in some areas, better than expected eg. timing, customer feedback, performance etc - this has provided a lot of comfort
WHAT DOES THE MARKET MISUNDERSTAND OF SDR
- Sankar does not think that investors, large shareholders, backers have misunderstood SDR
- The focus of the market seems to be mostly on the platform, platform capability itself
- What is not as well appreciated perhaps (1) SDR’s go-to-market capability and (2) Global distribution footprint - the combination of these 2, together with the underlying scaled platform is what will power the growth of SDR in the coming years
INVESTMENT THESIS
- Multiple opportunities to grow in a clearly articulated target market with a huge TAM
- New suite of products are transaction-revenue based - introduction of these allows SDR to ride the up wave of travel re-opening
- Similar to WSP, hard work to scale the platform, develop new products (including transaction revenue-based products), expand development centre footprint and rebuilding of post Covid sales & marketing capability is either done or is well underway, ensuring that the company can focus on growth-related activities, reaping the benefits of operating leverage - it has reached or has just past the inflection point
- Covid performance has demonstrated the resilience of the business and the unit economics
- Strong experienced CEO - Sankar inspires confidence that he understands the business levers very well, has a clear plan to achieve growth, is executing against the plan and the plan is showing results
- 3 key moats - (1) scale and global breadth of the platform (2) the global go-to market capability (3) no clear competitor of similar scale and capability
- Share price has been battered - at very attractive entry level of $3-20-$3.30 vs 52 week highs of $5.25, with limited downside 52 week low of $2.68
- Low M&A risk as management has clearly positioned SDR to be an organic growth play - this clarity is reassuring
- Free cash flow positive target by Q4FY2024
- CEO and Management alignment and skin in the game - Sankar owns about 2.7% of SDR
KEY RISKS
- Cost of customer acquisition is key to watch - failure of LTV/CAC metric to hit 4x and beyond would be a cause for concern - good risk to take given current trajectory of the business - MEDIUM
- Watch cash burn metrics against revenue to ascertain extent operational leverage has kicked in - MEDIUM
- Cyber security issues - that would be very damaging - MEIDUM
- Achievement of free cash flow target, failing which a capital raise could be required - MEDIUM
- Disruptions to travel industry re-opening - LOW
