On Tuesday, hotel software provider SiteMinder (ASX: SDR) reported its results. Revenue was up 26% to $190.7 million and the loss roughly halved to $28.5m. The company burnt about $10m in cash but retained a little over $40m. Back in June, I wrote an introductory article about SiteMinder, highlighting that it was on the brink of achieving free cash flow while growing its revenue—making it a good candidate for your watchlist. Now, with the release of their FY24 results, I will explore why I believe the new Smart Platform strategy is helping them build a competitive moat.
SiteMinder Financial Performance After FY 2024 Results
SiteMinder’s financial performance primarily depends on the number of properties (customers) using its services and how much each property spends on average per month (Average Monthly Revenue per Customer).
The trend is moving in the right direction—SiteMinder is increasing both its customer base and its product penetration among existing customers.
With a mix of subscription and transaction revenue, SiteMinder’s income expands as existing customers choose additional add-on services, or, in the case of transaction revenue, as their Gross Booking Value (GBV) grows. This dynamic allows SiteMinder to collect more revenue as its customer grows without additional sales efforts. However, it is also subject to the cyclical nature of the travel industry. At the end of FY 2024, subscription revenue made up 64% of total revenue, with the remaining 36% coming from transaction revenue.
Overall, SiteMinder’s gross margin for FY 2024 stood at 66.7%, with subscription margins around 85%, while the transaction revenue margin was just 32%. With growing ARR and revenue and effective cost management, SiteMinder achieved its first-ever positive EBITDA in the second half of FY 2024, as shown in the graph below.
Notably, in the fourth quarter of FY 2024, SiteMinder also reported positive free cash flow for the first time, marking a significant milestone for the company, as can be seen in the graph below. I have calculated free cash flow conservatively by deducting investment expense and lease liabilities from Operating profit (According to Management their underlying free cash flow for Q4FY2024 was $2.5m and according to my calculation it comes down to $755K).
SiteMinder Unit Economics
Unit economics answers a simple question: Can SiteMinder make a profit by acquiring new customers at its current acquisition cost? As a SaaS company, SiteMinder uses the LTV/CAC ratio to measure the overall value a customer brings over their lifetime compared to the cost of acquiring them.
Lifetime Value (LTV) represents the estimated gross profit SiteMinder expects to earn from a customer over their subscription’s lifetime, considering both subscription and transaction revenues. At the end of FY24, SiteMinder’s LTV was $24,160.
Customer Acquisition Cost (CAC) reflects the cost of acquiring a new customer, covering sales, marketing, and onboarding expenses over a period. At the end of FY24, SiteMinder’s CAC was $4,472.
In other words, SiteMinder spends $4,472 today to acquire a new customer, with the expectation of generating $24,160 from that customer over their lifetime. This gives an LTV/CAC ratio of 5.4 for FY24, and the trend shows that this ratio is steadily improving, as illustrated in the table below.
It’s commonly said that 3:1 is a good LTV/CAC ratio, where the business gets 3x the value of acquisition cost from each new customer – so on that front, SiteMinder is generating a lot of future value.
Smart Platform Strategy
At the start of FY24, SiteMinder was primarily embedded in customer workflows as a connectivity partner. However, with the new Smart Platform strategy, it is transforming into a vital tool for revenue management, aiming to revolutionize how hoteliers run their businesses.
The Smart Platform is built around three core pillars:
- Dynamic Revenue Plus: In partnership with IDeaS, this feature will power the pricing recommendation engine, helping hotels adapt quickly to changes in demand and optimize revenue. It is set to launch in the ANZ region in September 2024, with a global rollout planned for the second half of FY25.
- Channels Plus: Distribution is crucial in the hotel industry, and Channels Plus simplifies connecting hotels with multiple channels, expanding their reach with minimal effort. SiteMinder has signed agreements with over 25 distribution partners, including major players like Agoda, Trip.com, Hopper, and Meituan. This add-on product will be available in the first half of FY25.
- Smart Distribution: This feature ensures that hotels have optimal connections to the world’s leading distribution channels, streamlining operations for maximum efficiency. The service package, featuring an activity-based fee structure, is set to launch in the first half of FY25.
Why I Like SiteMinder’s Smart Platform Strategy
SiteMinder’s Smart Platform strategy addresses a key pain point for its customers: generating more revenue. By increasing the profitability of each property it serves, SiteMinder can become a critical supplier to its roughly 45,000 customers (hotels/properties). Once it becomes ingrained in their workflows, switching costs become high, potentially giving SiteMinder pricing power. After all, what hotel would switch platforms due to pricing, if doing so would reduce revenue generation by more than the price increase?
SiteMinder is also potentially creating a network effect with Channels Plus and Smart Distribution. The company can attract distribution partners because it already has a network of 45,000 properties. With leading distribution partners, SiteMinder can then sell this network back to hotels, offering a single integration for multi-channel benefits, making it an easier sell.
Valuation and Final thought:
SiteMinder has provided the following guidance for FY25:
- 30% Revenue Growth
- Underlying EBITDA Profitability
- Underlying Free Cash Flow Positive
As of June 2024, SiteMinder has $40.2 million in cash and cash equivalents, with an additional $32.1 million in undrawn credit facilities, totaling $72.3 million in available funds. From Q4 FY24, it has also turned into a free cash flow-generating business.
Currently, SiteMinder is trading at a market capitalization of $1.4 billion, with an ARR of $209 million, equating to 6.7 times ARR. While this valuation isn’t obviously cheap, the company is guiding for 30% revenue growth in the medium term and (I think) it is building a sustainable moat. As a shareholder, I cannot help wondering if it deserves a higher multiple.
Disclosure: The author of this article owns shares in SDR and will not trade SDR shares for at least 2 days following the publication of this article. The editor does not own shares in SDR and will not trade SDR shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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