What does Serko do?

“Serko is a technology company that simplifies the complex world of corporate travel management. Serko’s software platform is used by millions of travellers around the world to book and manage their work trips, and by thousands of companies to manage their corporate travel programs.” (blurb from serko.com home page)

Serko Mission: Annual report 2024

“Build the world’s leading business travel marketplace” A big aspiration………………

Looking forward - Catalysts & Bright Spots:

• Cash balance 80.6m
• Revenue increasing as per guidance
• Cash flow positive next year?
• Booking.com renewed license for 5 years recently
• Insider ownership/founders
• Value of 10+ years of data and trends

I did an analysis of Serko when it was listed. My interest was sparked by conversations with a friend in the travel industry who was integrating travel management systems for large corporations and government departments.

My observations at the time were:

• The travel industry didn't love the Serko platform, but the end customers did.
• Good marketers? The annual report, website and marketing material was slick.
• Strategy: Target the end customer, and the middle guy has to cop it.
• Success depends on cracking the international market and maintaining a leading customer-friendly interface
• Competition: Significant, especially in the US.

Friend's Insights (2019):

• Serko: Local online tool for corporate travel, catering mainly to AU and NZ markets.
• Popular with customers due to its suitability for this market.
• TMCs (Travel Management Companies) disliked working with Serko due to poor integration with other tools (e.g., profile management, expense management).
• Charged for every change (profitable for Serko, challenging for travel agencies).
• Back-end configuration was difficult for TMCs but was improving over time.
• Unique approach: Targeted customers directly, unlike other tools promoted via TMCs.
• Excelled in the AU market compared to global tools and smaller companies prioritized functionality over global consistency.

Since 2019 things have obviously changed.

• Introduction of Zeno, integrating expense tracking and other features.
• Onboarding of international customers:
• Booking.com using the platform for SME business
• Large international corporates (e.g., American Express Business Travel, Helloworld)
• Customer base now across many countries and companies
• Revenue and booking volumes returning to trend, ref graph FY24 Fin results 28/5/24

 Does anyone have user experience with the platform? (My friend has since moved into a different industry)

I held a position back then, but COVID challenged my conviction, and I sold out. I have bought a small research position this week.

Been looking closely at a few software and tech companies that have underperformed recently and in particular the management incentives.

Serko appears to have the most interesting incentives for the CEO as it is revenue based.

Not right in my opinion especially when you are burning cash and still get awarded on the slightest hint of revenue growth.

Should really be EPS based or weighted on the share price performance I think such as Gentrak

Could explain the insider selling recently.

Not sure if I like this one due to this incentive - unless there is an additional condition on the performance that I've missed and someone can point me out on it.

However I know this could go cashflow positive if corporate travel continues to recover.

[held GTK but not this one]

The key Booking.com agreement is up for renewal in May 2024 - the key driver of growth in recent years.

Seems a bit binary (but more likely it will get renewed) but if so and the current economics play out it will tip into profitability (inflection point) in FY25 (absent a world travel disaster - war/recession).

One to watch as could be interesting - especially if Booking.com eventually makes a takeover offer too.

Serko released a Trading Conditions update to the market on the 3rd February 2022.

In the update it advised that:

• The rise of the Omicron variant had adversely effected business travel in it's key markets since it last issued guidance with the release of its 1HFY22 results in November 2021.
• Lowered FY22 guidance due to Omicron impacts on travel to NZ$18M - $20.5M from NZ$21M - $25M
• Cash burn averaging NZ$4M per month in 2HFY22.

My thoughts:

Such an update wasn't unexpected given the impact of Omicron so no real surprises. However it does confirm delay on return to revenue growth on pre-COVID levels and continued deep losses and burning through cash. I don't think it really impacts the thesis though and I'd already considered this update in my recent valuation straw.

After the most recent cap raise of NZ$85M and the NZ$52M cash they had at the end of 1HFY22, minus 4 months cash burn of NZ$16M, they should have NZ$121M left.

If they make NZ$20M in revenue in FY22 and burn NZ$48M, so net cash outflow of NZ$28M for the year, which is slightly better than FY21, it means they have 4 years of cash left, if losses don’t widen further. Hopefully they can get to breakeven by that point so they don’t have to raise again although I think that’s most likely a forlorn hope!

The obvious one is COVID. It has had a massive impact on the travel sector, including business travel, with border closures, lockdowns and travel restrictions from both government and private organisations causing business travel to virtually evaporate.

Speaking from personal experience as someone who usually travels a lot for business, I averaged over 50 flights a year pre-COVID but have been reduced to less than 10 per year the past 2 years.

The longer the pandemic goes on the longer Serko’s revenues are suppressed and, as a loss making business, the more cash it burns through. This has already lead to several capital raises and the share count increasing by 30% since the start of the pandemic as Serko raised capital to fund itself. If it goes on for too long Serko may eventually find no one wants to give it any more money. Even if that does not happen, the dilution risk to shareholders is real.

More structurally, the risk is that the North American expansion does not take off. Given the Bull case is based almost entirely on overseas expansion (particularly North America) and it trades on extremely high revenue multiplies with massive growth expectations baked in, if that happens Serko will suffer a brutal re-rate as the market adjusts expectations.

To my mind this is the greater risk than COVID.

Transaction volumes showing positive uplift

Serko Limited (NZX/ASX:SKO), a leader in online travel booking and expense management for business, today provided a trading update, noting that transaction volumes are showing a positive uplift.

Mr Grafton, Serko’s CEO, said: “During March we have seen transaction volumes increase, with transactions month-to-date averaging 68% of the transaction volumes recorded for the same period in March 2019, which were unaffected by Covid-191 . As previously announced, Serko has assumed in its forecasts that travel volumes will be transacting in the range of 40-70% of pre-Covid levels by March 2021, so we are pleased to see transactions currently tracking to the higher end of this range.

“We are also seeing daily transaction volumes reaching their highest rate since Covid started materially impacting Serko’s travel volumes in mid-March 2020, and are pleased to note that some of this uplift is reflective of continued onboarding of new customers in Australasia despite the effects of Covid.

“These positive trends follow ongoing volatility over the past few months as a result of further Covid-related travel restrictions, which saw transaction volumes range from 58% of prior year volumes for the month of December 2020, 40% for January 2021 and 51% for February 2021.”

“We continue to closely monitor travel trends and hope to see these positive trends continue with the vaccination programs underway in key markets and travel restrictions progressively lifting.” 

DISC: I Hold

*Numbers in NZD*

Serko is raising up to $55m via a $45m institutional placement and $10m share purchase plan. The placement is underwritten at a floor price of $4.35.

The COVID pandemic has been difficult for Serko, with booking volumes and revenues down by up to 80% in calendar 2020. However, it is also presenting significant opportunities to accelerate growth and take market share while other competitors are struggling. Travel management companies (and their corporate customers) are increasingly using this ‘down’ period to accelerate the shift to Serko’s booking software. This demand has exceeded Serko’s expectations.

Although its current cash balance of ~$33m is likely sufficient to see it through the next 12-24 months, Serko moving from defence to offence and is raising additional capital to take advantage of these opportunities. It will use the funds to:

• Accelerate the development and global roll-out of its software platform;
• Continue to expand the platform’s capabilities and content channels across all markets, responding to new and changing business traveller needs;
• Fund small M&A opportunities (noting that Serko has been receiving a number of offers to acquire smaller travel related companies).

Interestingly, in the capital raising presentation, Serko notes that it is currently in negotiation for a large direct contract with a US Fortune 500 company. Previously, almost all of Serko’s bookings are done via travel management companies / booking agencies.

Generally, I’m not a fan of capital raisings because they dilute existing shareholders and indicate a business’ inability to fund its own operations. However, this raising appears to be in response to increasing demand for Serko’s booking tools and opportunities within the global travel market – Serko is on the attack. I am likely to participate in the SPP.

Serko has been busy during COVID lockdown, with the highlights being:

—   New resellers agreements: Serko has signed new reseller agreements with LUXE Travel Management (July), Acendas Travel (July) and Ovation Travel Group (August). This is great traction for Serko in the North American market. These agreements have been made under Serko’s Community Program – which incentivises resellers to take up Serko’s software platform by accelerating their on-boarding process, deferring implementation fees and not requiring minimum bookings until 2021.

—   Awards: Serko was named the New Zealand Hi-Tech Company of the Year 2020. Serko had been nominated as a finalist 8 times before this year, but was yet to win the award. This award has previously been won by Xero (2013, 2015) and Pushpay (2019).

A couple of quotes from travel booking companies that have signed up with Serko:

—   LUXE: “Everyone who participated in the testing absolutely loved Zeno compared to the other tools on the market… We also found that Zeno was the platform that was most ready to handle New Distribution Capability (NDC) content. That was important because we all have to prepare for NDC and prepare our travellers for it, too.”

—   Acendas Travel: “Zeno is a ground-breaking product that finally gives all parties what they need, whether that’s ease of use for the traveller, control and visibility for the travel manager or rich merchandising for the supplier,” said Acendas SVP, Corporate Travel Joe Curtis. “Particularly with the Zeno expense offering, we foresee this agreement as a way for us to better compete — both in customer retention and acquisition — in competitive bid situations. To top it all off, working with the Serko team has been an incredibly positive experience.”

—   Ovation Travel Group: “The level of flexibility and customization available through Zeno is impressive,” said Michael Steiner, Executive Vice President at Ovation. “Because our team at Ovation takes immense pride in providing highly personalized, top-of-the-line service to our clients, offering the Zeno booking and expense solution felt like a natural fit. Zeno’s fresh, user-friendly interface appeals to modern travelers and travel arrangers and at the same time, it’s programmable and flexible enough to meet each client’s unique needs.”

https://www.serko.com/news?submissionGuid=1f8e1506-e517-4b4b-bdc6-5d93f512dd5f

• Serko is a fast growing technology business that has developed leading travel booking software, a strong market position in Australia / New Zealand and a vast (and growing) existing reseller (TMC) network.
• It exhibits typical SaaS qualities – i.e. the technology should be highly scalable and revenues are predominantly recurring, sticky and highly predictable. Serko is currently investing heavily in product development and integration into new markets (with a focus on North America), however once the business is more mature it should be capital-light and therefore should benefit from significant operating leverage over the medium to long term.
• The global online travel industry is large and growing quickly as international travel increase and more travellers are using online solutions to book and manage their travel. Serko has estimated the Australia / NZ market at $10b, UK & Europe at $330b and North America at $338b. Pre-COVID, IBISWorld had forecast industry revenues to grow at ~10% annually for FY19 to FY24.
• After a $45m capital raising in October 2019, Serko has financial firepower to continue to invest in the platform and drive its expansion into new markets. As part of this raise, Booking Holdings, one of the largest global providers of online travel services with a listed value of US $83b, took a ~5% stake in Serko and expanded its existing agreement to offer and promote Zeno to its corporate travellers. Management expect this to have a material impact on revenues in FY21 and beyond via an uplift in ARPB. Serko has also extended its reseller agreements with other TMCs (e.g. Carlson Wagonlit Travel (CWT)), to make Zeno available to US and Canadian customers.
• Serko is not only looking to expand geographically, but also into the SME market. The Booking Holdings agreement should help drive this expansion, further Zeno has strong integration with Xero’s accounting software.
• There appears to be a clear pathway to $100m annualised revenues, with management currently guiding for 20-40% revenue growth in FY20. Serko has proven that it can be profitable (in FY19), however is instead executing a growth strategy for long term value creation.
• Serko’s leading and patented technology, plus its vast existing reseller network, represent growing competitive advantages. If it is able to achieve scale on a global level, by growing a large and loyal customer base who become accustomed to using Zeno to book and manage travel, Serko should have the ability to exert strong pricing power.
• Serko is still managed by the two co-founders, Bob Shaw (CSO) and Darrin Grafton (CEO), who developed the original technology together and both have 25 years of experience in the travel technology industry. Together, the two co-founders own ~25% of the company, even after a small sell-down in October 2019. Serko has maintained the same Board since listing on the NZX in 2014.
• Recent changes in the online booking industry, specifically the New Distribution Capability (NDC), have opened commercial opportunities for Serko’s technology to become the platform not just for booking flights but also purchasing other related services such as in-flight entertainment and meals, premium seat selection, lounge access etc.
• Ultimately, Serko’s vision is for its Zeno platform to become the preferred marketplace for travellers to connect with preferred suppliers across the 7 phases of their travel journey (i.e. fly, stay, move, eat, work, play and rest).

• The global travel industry is highly competitive, with margins shared between airlines, TMCs / OTAs, search aggregators such as Kayak and TripAdvisor, and others (e.g. technology providers). Google has also entered the space with Google Flights, which searches for the best airline tickets, and is growing quickly.
• As with all technology companies, what is ‘the leading or preferred solution’ at any point in time is fluid and subject to change – there is the ever-present risk that a competitor will develop a superior software solution with greater commercial appeal. There are a number of TMCs that have developed or acquired their own booking software – for example, Webjet has developed Rezchain in collaboration with Microsoft, which enables users to eliminate cost discrepancies in hotel bookings. Although not in direct competition with Zeno, the point is that there are always new technologies being developed.
• Serko’s business model involves close partnerships with TMCs, including explicit revenue sharing. Subsequently, there are always risks associated with maintaining these relationships.
• Serko is currently trading on high valuation multiples, the business is not expected to be materially profitable in the short term, and will be burning through cash (~$5m per 6 months) as it invests for expansion. Any slowdown in growth will put pressure on the share price. Further, in the latest half (6 months to 30 September 2019), Serko capitalised 70% of its R&D expenditure such that it did not flow through the P&L, up from 50% in the prior corresponding half.
• The current growth strategy, including entry into new markets (i.e. North America and Europe) present significant execution risk. Serko will incur significant capital expenditures relating to product development and integration, as well as greater sales and marketing capabilities.
• Key personnel risk – Serko is highly dependent on its 2 co-founders, and if one were to leave or significantly sell-down, this would likely result in a significant share price decline.

Serko is a SaaS technology business that provides online corporate travel booking and expense management software. The company’s software products include:

• Zeno travel, an online booking tool that corporate travellers use to book flights, trains, hotels, rental cars and airport transfers in line with corporate travel policies;
• Zeno expense, a cloud based expense management solution that automates the process of corporate card and out-of-pocket expense submission, reconciliation and reimbursement;
• Serko mobile, a mobile app that gives users access to information and travel booking functionality.

Serko sells and delivers its travel booking software through a network of 50+ travel management companies (TMCs) and Online Travel Agents (OTAs), such as American Express Travel, CWT, Orbit Travel and Corporate Travel Management, who in turn provide booking services to their corporate customers incorporating Zeno. Serko then upsells its expense management software directly to these corporates. There are 1,300+ corporate customers using Serko’s software, including (among others) KPMG, PwC, NAB, Siemens, Fonterra, NSW and Queensland Governments and IAG.

Under its current business model, Serko derives revenue in a number of ways:

• Booking fees when corporate travellers make a booking via Serko’s platform (varies based on volume), paid by the TMC;
• Commissions on hotels, rental cars, airport transfers etc. booked through the platform, paid by the service provider;
• Monthly subscriptions paid by corporates using the expense management software based on the number of active users (i.e. their employees) using the platform;
• Subscription revenue when corporate travellers download and use the Serko mobile app;
• Services revenue for customisation, marketplace integration or implementation assistance requested by customers.

All revenue streams, except for services revenue, are recurring.

Serko is listed on both the ASX and NZX. The company employs ~200 people worldwide, with headquarters in New Zealand and offices across Australia, China, India and the US. Currently, over $6b of transactions are booked through Serko’s platforms.

Serko’s current strategic focuses are:

• Expansion of its Zeno platform into North America (and later on, Europe);
• Continuing to build its TMC / OTA reseller network;
• Penetrate the SME market with a self on-boarding module and non-travel resellers;
• Increasing its average revenue per booking (ARPB) by migrating users from legacy platforms to Zeno and offering increased content and functionality.