Joseph Taylor: So, Roy, you recently added SiteMinder (ASX: SDR) to your coverage. Can you give us a quick overview of what the company does?

Roy Van Keulen: Sure. So, I think the easiest way to think of SiteMinder is that they are like Shopify (NYS: SHOP) for hotels. So, if you run a hotel, especially a small or medium-sized hotel, what you want to do is attract demand from all the different channels. So that includes the OTAs, Booking (NAS: BKNG) and Expedia (NAS: EXPE), corporate travel, you want to be on all the search engines like Google hotel and Tripadvisor and the likes. You also want your native demand channels running well. So that means you need to build a website, to have a website builder similar to Shopify. They have a booking engine that's well converting. So again, that's how it's very similar to Shopify, analytics in the background et cetera. So, they offer all of those mostly demand style e-commerce software for medium and small hotels.

Taylor: So, they basically connect hotels to the outside world.

Van Keulen: Yes.

Taylor: So, what does the competitive landscape look like?

Van Keulen: It's not exactly a unique offering that they have. There's a lot of companies that offer this, and they can be divided in a couple of ways. So, you have some that offer for small hotels and then you have very large hotel chains that have more custom-built things. SiteMinder sits in the middle for hotels of mostly medium size, small to medium-size, that has a bit of a higher level of professionalism but lower than the big chains.

Taylor: Okay, great. And you've assigned SiteMinder a narrow moat rating straight out of the gate. So, this means you think that they have some kind of durable competitive advantage. What led you to that?

Van Keulen: Yeah, so it's funny. If you say this product suite is commoditized, there's not a moat there. But where we think the moat is coming from is basically scale-based advantages. So, they are about twice the size of the nearest competitor. And I think this is an industry structure that – and they're only 5% of the market, right? So, I think this is an industry structure where you're going to see kind of a war of attrition. So, war of attrition is what's your burn rate and how much do you have left in the tank to survive that.

Given that they are twice the size, there are some advantages there. And those advantages tend to come from just the fixed cost that's inherent in working with the travel industry. So as a channel manager, which is what SiteMinder are, they need to build integrations into hundreds of OTAs. And that's just the cost of doing business. Everyone has to do that. But if you can fractionalize that cost over a customer base that's twice the size, you have a lot more leverage on that. So that's where I think there's a lot of leverage on size that simply no one else has. So, you need to maintain in the long run a competitive offering which has these hundreds of integrations which has fixed costs which they can amortize over or fractionalize over a larger customer base. So that is the moat source, the scale-based advantages that deliver cost advantage.

Taylor: So, you mentioned that most of SiteMinder's clients, they need, they need Expedia, and then they also have a lot more channels that they can dip into. So, one of the attractive things from your report was this new Channels Plus product.

Van Keulen: Absolutely.

Taylor: And that allows the client to access a lot of second tier channels at once. Is that roughly correct?

Van Keulen: Yeah. So, Booking and Expedia have a lot of the market. So clearly, they are your most important channels. But if you think from the profitability perspective of a hotel, that's kind of your baseline, but every incremental channel that you manage to add, it might add a little bit to the top line, but a lot to the bottom line because your margin is not great. If 10% of hotels churn every year, it's not an extremely high-margin business on a bottom-line perspective. So, you want to get more of those channels in. But as I said, it's expensive to set up.

With Channels Plus, they take a variety of second or third tier channels, stitch them up together so that from your perspective of a hotel, this is just a single channel. So, you set it up once and now you have access to Ctrip, Hopper, other smaller channels, but together this becomes a very substantial channel. So, we think that is an extremely attractive offering that kind of gives a second moat source, namely, network effects. Because these OTAs are now working with SiteMinder to do it, and they're basically doing it because SiteMinder is already so large. So that sets up a network effect as another moat source. But this is an early product in testing. So, we think that will be a driver in the future.

Taylor: Perfect. And earlier you mentioned quite quickly that SiteMinder isn't profitable at the moment. It's not making a profit. So, when do you expect that to change? And are investors at risk of being diluted, for example, to fund the growth?

Van Keulen: Yeah. So, from a – it's difficult to say exactly because there's macro events that some people try to predict. I think it's pointless. You can't really predict when there will be a travel recession or something like that. A third of their revenue comes from transaction-based revenues. So that is really tied to these macro events. We take more of a, what's an average 10-year growth rate and project that. Based on that, it wouldn't be five years into the future. It wouldn't be three years, probably a bit earlier. Even if – you asked the risk about dilution – they have some more money in the bank. They can go a bit longer. And even if they run out of that, they have some debt facilities as well. So that extends that before you need to get diluted if that's a major issue. But there's also another consequence of a hit to the industry. And what tends to happen is, a stock price gets whacked because the near-term multiple comes down and a third comes from transactions. But that third of the business that gets hit is the same for everyone. So, if you think again about this war of attrition, it's a hit that everyone takes, but they would be most likely to come out of that on the other end, whereas the industry could shake out. So, it could be an attractive catalyst if you want to look through that.