Following the post on SDR's 1HFY24 results earlier, here is the summary of the SDR 3QFY24 Appendix 4C. More of the same from 1HFY24 ...

Very excited with progress on the 2 new capabilities currently in pilot release ahead of 1QFY25 release as this will propel SDR's next phase of growth, in parallel to the ongoing growth in the current base products.

Discl: Held IRL and in SM

KEY POINTS FROM THE ANNOUNCEMENT

• Revenue increase driven by SDR’s metasearch offering, Demand Plus, driven by accelerated adoption and strong booking activity
• Net subscriber addition momentum continued from 1HFY24, focused on larger properties (vs the target market of small, independent hotels)
• Continued improvement in FCF - underlying FCF was ($0.2m), now only (0.4% of revenue) - accelerating throughout FY24 thus far - continuing benefits of sustained strong organic growth and operating leverage
• Liquidity remains strong at $72.2m
• No change to FY24 guidance - (1) organic revenue growth of 30% in medium term (2) underlying EBITDA profitable in 2HFY24 (3) underlying FCF positive in 2HFY2024.
• On track for mid-CY2024 release of 2 Smart Platform products
• Channels Plus:
• Signed up Trip.com Group to participate in the Channels Plus Program
• Channel Plus continues to gain traction - 14 distribution partners have signed up
• Channel Plus pilot commenced 29 April 2024, limited to 1,000 hotels, has drawn strong registered expression of interest from existing customers
• Dynamic Revenue Plus:
• Mobile App launched in March well received by users

Belatedly worked through SDR's 1HFY24 results and last week's 3QFY24 Appendix 4C after leaving it aside for about 6M.

The FY2024 slides is an easy read and tells the story very clearly SDR 1HFY24 Preso

Added notes taken during the 1HFY2024 call and a summary of the P&L and KPI's across the halfs, so that I can more clearly see the trend across half's rather than pcp.

SUMMARY

• This is a company that is firing on all cyclinders today, with new capabilities in pilot release now, which will drive the next wave of growth from FY2025
• Positive momentum and operational KPI’s all steadily trending in the right direction and improved on the pre-Covid 2019 trajectory - subscriber growth, across all regions
• Scale and leverage is clearly showing as revenue grows - unit economics continue to improve, LTV/CAC continues to grow, Sales and Product Development expense as a % of revenue continues to fall
• Underlying cash flow positive in 1HFY24 - on track to target of cashflow positive in 2HFY24
• Driving industry change via Smart Platform - the integration of Distribution, Intelligence and Revenue Optimisation, as the hotel industry is far behind airlines in yield management
• Smart Platform will provide the next step increase in SDR’s growth - good progress made in 1st 2 capabilities of Demand Plus and Channels Plus - due for release in 2HFY2024, will full impact to be felt in FY2025 - increases the moat
• Smart Platform will also see more transactional monetising opportunity for SDR by taking a clip of the gross booking value that goes through the SDR platform
• SDR is rapidly growing its base market with a huge TAM to go and in parallel, rapidly building new capabilities that will drive improvements in hotelier revenue via improvements in yield management

KEY POINTS FROM 1HFY24 INVESTOR CALL

• Comparison CY2023 against Pre-Covid CY2019 a better indication of performance as CY2022 was Covid-distorted - unable to sustain acceleration rates when compared to a distorted 2022, but underlying growth from CY2019 is ongoing
• APAC and Aust - higher growth pace, expect Asia to grow scale
• Subscription growth momentum - good pipeline and additions in 2M in CY2024, no slowdown
• Transactions held up better than most majors:
• GDS - big beneficiary of return of leisure travel post Covid
• Pay - on par with average growth rates
• Demand Plus - strong ability to drive activity and share of Gross Booking Value - strong in Jan/Feb
• LTV/CAC is 5.3x - higher than pre-Covid, LTV has expanded and CAC continues to moderate
• Channel Plus Partners - signed on Agoda and Hopper
• Agoda is either top 5th or 6th of global channels, strong in Asia and is very big
• Channels Plus takes away friction from inventory management
• Both sides have monetising opportunity - SDR, Hotels, Online Travel Agent
• SDR is one of the largest supplier of inventory to the majors
• Channels Plus creates new distribution channels, is not part of Demand Plus - complementary, not cannabilistic
• Channels Plus - hotel has 1 pipe which opens many distribution channels - removes inventory management friction
• Pilot in mid-CY24, impact will be seen in FY2025
• Revenue growth is driving leverage and scale
• Positive Underlying Cash Flow in Q1 and Q2
• Not looking at M&A

Discl: Held IRL and in SM

Went through the SDR Investor Day Presentation slide pack released yesterday 16 Oct 2023:

https://www.asx.com.au/markets/company/SDR

It was well worth spending the 25-30 mins working through the 78 slides to get a flavour of the 2 Smart Patform offerings targetted to be released in FY24 and the opportunity ahead to upsell within existing customers, over and above the signing up of new hotels.

Having had some past exposure to cruise ship revenue management and reservation systems, the offerings make complete sense to me. It solves some big problems, especially for smaller hotels that do not have extensive distribution and revenue management capabilities.

Very keen to see how the SDR customer base takes up these new offerings and the resultant financial impact in the coming Q's.

SUMMARY

• Strong uptake of SDR offerings across the 4 Global Hotel Industry segments
• Significant TAM remaining to chase
• Rolling out “Smart Platform” - sophisticated revenue management capability which converges distribution, intelligence and revenue optimisation to maximise hotel revenues
• 2 new offerings under Smart Platform:
• Dynamic Revenue Plus - real-time recommendation engine to help identify optimal commercial actions a hotelier can take in response to external events, intelligence etc. Address challenges in the lack of revenue management capability in small hotels
• 5 use cases showcased (slides 35-48)
• Channels Plus - capability to automatically connect distribution channels and hotel properties as they sign up to the program out of the box, eliminating today’s friction in many connections, agreements, connectivity configurations (slides 56-62)
• Commercial potential to deliver >10x ROI to hotels at 1% monetisation of FY23 GBV (Value of bookings processed by SDR)
• Previous guidance was reiterated - (1) target 30% organic revenue growth in the medium term (2) underlying EBITDA profitable and underlying free cash flow positive for H2FY24.

Discl: Held IRL and in SM.

SDR's FY23 results had no surprises as most of it was revealed during the earlier 4Q Appendix 4C Release. However, these charts in the pack stood out for me as it provided a bit more "colour" on the performance.

It was a strong result and it is executing/delivering on the trajectory Sankar said it would. Will be interesting to see how much this holds up in the next 2Q's as global economies decelerate further, eating into discretionary travel demand.

Discl: Held IRL and in SM.

• Growth was strong across all regions in terms of revenue and property additions

• Strong subscriber Net Additions, again across all regions, and strong uptake of transaction-based products

• LTV/CAC metric was missing in the 4C announcement - moved to 4.1x for FY23, but improved to 4.8x 2HFY23, HoH moves appear to be accelerating, as Sankar said it would
• LTV was up 9.7% to a record $23,212
• CAC improved 14% from $6,386 in FY22 to $5,469 in FY23, driven by operating leverage. CAC for H2FY23 was $4,890

• Both Sales & Marketing and Product Development cost as a % of revenue are trending down rather decisively

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