The Siteminder Ltd (ASX: SDR) share price is down 42% from its 52-week high, but it's such an interesting company that this weekend, I decided to take a closer look at it.
Siteminder provides software for hotels to manage their online bookings, pricing and payments from multiple sites (think Booking.com, Expedia, Airbnb, or directly on the hotel's own website) all in one place.
This prevents double bookings and saves hotels time and effort. In exchange, Siteminder earns subscription fees and transaction-based revenue.
Whilst there is a lot to dive into, here's what you need to know.
Rule of 40
For a software company like Siteminder, investors want to see a combination of strong revenue growth (ideally 30+) and high profit (or free cash flow) margins (ideally 10+) such that the sum of the two exceeds 40%. This is widely known as the "Rule of 40."
Source: Siteminder H1FY25 investor presentation
NB: Siteminder excluded restructuring costs of $5.1m to determine its H1FY25 underlying free cash flow.
As you can see from the graph above, Siteminder's Rule of 40 metric has gradually improved from negative 19% soon after its IPO to a positive 19% based on the most recent numbers.
While that's a strong improvement, it is still well below 40%. So, the real question that I think investors will be asking themselves is, will Siteminder achieve and exceed 40% in its Rule of 40 metric? And if so, what levers will it pull to get there?
New Products Driving Revenue Growth
Like most software companies, I think the best lever for Siteminder to pull would be a reacceleration of revenue growth.
H1FY25 annual recurring revenue (ARR) increased by 22% year-over-year, falling short of the company's 30% FY25 revenue growth guidance. This can be somewhat explained by the fact that this product rollout is in its early stages, and some of that growth can be made up for in the second half of the financial year.
The bigger issue for me, however, is that in my view, ARR growth needs to accelerate to at least 40%+. Given the size of Siteminder's market opportunity (the company estimates a total addressable market of 1 million hotel properties and has a current customer base of 47,200 properties), I would expect that 40% growth is a realistic target.
Management contends that a key catalyst for ARR growth is the rollout of new products under the Smart Platform strategy, which aims to help hotels generate more revenue.
Products being rolled out under this strategy include Dynamic Revenue Plus, which helps hotels quickly adjust their prices based on changes in demand, and Channels Plus, which lets hotels easily expand and manage their presence across many booking websites, giving them more control and reach.
Siteminder's goal here is to help its customers generate more revenue and then charge a percentage of the gross bookings value (GBV) as a fee.
Looking Ahead
Siteminder is an impressive business that's showing real signs of promise, but it still has hurdles to clear to meet investor expectations.
This is a company that is featured high on my watchlist, and the big questions I'll be monitoring for answers over the next 6–12 months are:
- Can Siteminder convince more hotels to adopt its new Smart Platform products?
- Will that lead to faster revenue growth, ideally getting closer to 40%?
- And can it do this while keeping the business near breakeven to achieve and maintain a strong Rule of 40 score?
Even small improvements in the right direction here can create powerful results over time.
