SiteMinder To Thrive On New Product Launches

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Analysts overlooked a softer revenue performance from SiteMinder to espouse the virtues of the company’s new, market-leading products.

-SiteMinder’s June quarter revenues slightly missed expectations
-Announced new products take centre stage
-Innovation puts SiteMinder ahead of the field
-Analysts excited about FY25

SiteMinder ((SDR)) is a Software-as-a-Service company that develops, markets, and sells online guest acquisition platform and commerce solutions for accommodation providers in Australia and internationally.

The global hotel industry has been dominated by legacy technology and slow adoption of digitisation given the prevalence of independent hotels, Ord Minnett suggests, which control 70% of global rooms. At the same time, Business-to-consumer (B2C) selling agents are swarming the segment in unprecedented numbers given the downward pressure on airline remuneration.

Further, hotel revenue per available room (RevPAR) is moderating as conditions normalise post covid. This suggests the timing of SiteMinder’s new products could be perfect with a runway of three to five years before competitors catch up.

While SiteMinder’s June quarter results showed a slight shortfall on revenue expectations, the company’s new product announcements were sufficient for analysts to hail a positive update.

All the World’s a Stage

SiteMinder’s June quarter revenues were up 26% year on year at $53m but fell a little short of consensus forecasts. This was largely due to short-term promotional activity, being -50% discounts for six months to target larger properties.

Operationally, the company delivered solid net additions in the second half, with a strong contribution from Europe/Middle East/Africa and the Americas (70%-plus growth in rooms sold given the skew to larger hotels).

But for analysts, the June quarter was not the story.

SiteMinder represents a prime example of a company about to enter Stage Three of the classic McKinsey three stages of growth model, Ord Minnett suggests. Before you ask:

Stage one represents those core businesses most readily identified with the company name and those that provide the greatest profits and cash flow. Here the focus is on improving performance to maximise the remaining value.

Stage Two encompasses emerging opportunities, including rising entrepreneurial ventures likely to generate substantial profits in the future but that could require considerable investment.

Stage Three contains ideas for profitable growth down the road — for instance, small ventures such as research projects, pilot programs, or minority stakes in new businesses.

In Stage Three, SiteMinder’s current management team is set to launch two new products — Dynamic Revenue Plus (DRP) and Channels Plus (CP) — which explore entirely new and disruptive innovations that could reshape the organisation’s future. Ord Minnett’s extensive industry analysis suggests the CP product, and to a lesser extent DRP, fit these criteria and could drive material incremental revenue of $389m by FY30, increasing to $864m in FY35.

But the “third pillar of the growth strategy” announced last week is the Smart Distribution Program (SDP), a product to better connect SiteMinder’s hotel customers with global distribution partners. The SDP has large global online travel agents (OTA) paying the company in exchange for improved set-up and configuration of hotels and ongoing improvement and optimisation of the connectivity solution.

Citi sees the SDP as essentially adding a second monetisation stream for the core Channel Manager offering, with OTAs paying a fixed fee per gross property added and a variable performance fee based on volumes on the platform.

The launch of SDP de-risks FY25, in Citi’s view, and also reduces execution risk in the near-term, as ostensibly an extension of the core Channel Manager.

Looking Ahead

Citi has increased its FY25 revenue forecast slightly to 26% year on year growth, which assumes 22% underlying growth and a 4% contribution from SDP and CP. With annual recurring revenue currently growing at 21% year on year, the broker assumes first half revenue growth of 21% before accelerating to 31% the second half.

This will be driven by $5m in revenue from SDP, a $3m revenue contribution from CP, the rollout of payment terminals and expansion of SiteMinder Pay to new regions, plus increased penetration for DRP, driven by Google ending commission bidding as well as the launch of an Enterprise version.

The SDP should contribute mid-high single digit millions in revenue in the second half at better than 70% gross profit margins, Goldman Sachs estimates, ahead of any potential benefit from DRP and CP. The former is planned for a first quarter release, but the revenue impact will be limited in the first six months until launched globally in March. CP is planned for launch in the second quarter.

This supports SiteMinder’s expectations for annual recurring revenue growth to accelerate towards the high 20s to 30% in FY25, albeit second half-weighted, in-line with management’s reiterated medium-term aspirations of 30%-plus revenue growth.

Positively, says Goldman, SiteMinder has shown strong progress on its “Rule of 40” performance*, improving to 21% in the second half, with the free cash flow margin expected to remain in the single digits as the group focuses on driving revenue acceleration in the near to mid-term instead.

*The Rule of 40 is a principle that states a SaaS company’s combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a sustainable rate, whereas companies below 40% may face cash flow or liquidity issues.

Product enhancements should underpin strong transaction growth momentum in the medium term, UBS believes, particularly in pay terminals and geographic expansion. Accelerating new subscriptions momentum is solid, and the broker expects the skew towards larger properties to increase revenue quality by lowering churn and increasing monetisation.

The trajectory towards the Rule of 40 is positive, UBS suggests, however management indicated this will increasingly be underpinned by revenue growth as opposed to free cash flow margin expansion.

Not a Doddle

The key driver of share price strength in response to SiteMinder’s update, suggests Morgan Stanley, was reiteration of product timelines and confidence on incremental revenue in FY25.

The SDP will be meaningful from FY25 as a new initiative to link hotel customer inventory more effectively into global distribution partners, reinforcing Morgan Stanley’s view gross payment volume and take-rate will come more sharply into focus.

CP confirmed increase in participating hotels and channels and general availability in the second half of FY25, the broker notes. The DRP pilot is now live in Australia and New Zealand and globally by March 2025 with an integration with revenue management vendor IdeaS. As for Payments, the rollout in Asia and terminal rollout provide more longevity to the story.

Yet, Morgan Stanley notes key concerns.

The broker expects greater reinvestment to limit operating leverage, increasing sales but lowering earnings. Morgan Stanley expects this to be well-received as long as SiteMinder can deliver the sales re-acceleration.

With DRP, some investors clearly felt the change in recognition to the time of booking from time of checkout inflated the sales performance. Meanwhile, a change in revenue recognition, new partnerships, new products and promotional discounting was a lot to digest, especially in the absence of how new products will be included in segmentals.

Ord Minnett’s enterprise value to revenue scenario analysis suggests the old business could be worth around $8.00 per share and the new products (excluding SDP, which the broker is yet to incorporate) could add a further $6.00 per share.

While things rarely move a straight line, warns Ord Minnett, material upside to the share price is expected for the coming years.

Ord Minnett, Morgan Stanley, Citi and UBS all have Buy or equivalent ratings on SiteMinder, and are all monitored daily by FNArena. Their consensus target price is $6.90, but while the latter three are cluttered around the $6.70 mark, Ord Minnett stands out with $7.55.

Not monitored daily, a more circumspect Goldman Sachs has a Neutral rating and $5.70 target.

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