The small group that made over $ 500 million in Siteminder’s IPO
The software is now used by over 32,000 properties in 150 countries and integrates with over 400 websites and distribution channels.
Siteminder’s IPO was a big win for CEO Sankar Narayan, who was previously COO of Xero. He didn’t get the top job at Xero, but has likely made a recovery as he now owns $ 50 million in Siteminder shares after just three years.
These three years have certainly not been easy, especially given the dramatic impact of COVID-19 restrictions. In FY 21, Siteminder reported a pro forma loss of $ 28 million (a non-monetary event produced a huge statutory loss of $ 122 million).
Revenue fell 10% to $ 101 million and was almost back to 2019 levels, although annual recurring revenue (ARR) rose 12% at constant exchange rates.
While it’s reasonable for the company to sacrifice profit for growth, it has racked up $ 50 million in losses since 2019 while barely increasing revenue. The company is now trading at around 18 times trailing income and an infinite multiple of profit.
Even taking the pandemic into account, this drop in performance and lack of long-term income makes the big side sale surprising.
Only $ 90 million of the $ 627 million raised went to the company, and TCV was not the only big beneficiary. Ford sold $ 75 million, although his remaining $ 85 million will keep him a motivated director.
The biggest winner of all was former Siteminder chairman and first investor Les Szekely. The humble and well-respected Szekely is a consistently successful Australian angel investor, and now plies his profession as chairman of Sydney-based venture capital firm EVP.
He sold nearly $ 100 million of shares in the IPO, but also chose to keep the same amount again.
The Bailador listed investor kept an even higher percentage. Co-founded by former Fairfax CEO David Kirk, the float increased the value of Bailador’s stake to $ 100 million, but it kept 85% and now represents 6% of the ledger.
The market clearly expects growth to return in FY 22 and these insiders believe Siteminder will be worth several billion more going forward. But it is unlikely to be the same company as before the crisis.
The annual value of Siteminder (ARR) subscriptions fell 7.5% during COVID-19, and even if surviving hotels return, subscription revenue will likely represent a smaller share of total revenue in the future.
Indeed, while subscription ARR has fallen, transactional ARR has risen sharply from $ 9 million to $ 21 million in FY21.
It is likely to continue to rise and this move towards ticket splitting, or what is known as “usage-based pricing”, is a global trend. A recent report found that 45% of all software as a service companies now have some form of usage-based pricing, and 20% plan to add it.
The same study also found that usage-based pricing improved customer loyalty and marketing ROI, and also accelerated revenue growth.
It looks like Siteminder is moving towards a hybrid model of subscription and usage fees. The main risk of this change is that its gross margin on subscription revenues will be 82% compared to only 31% for transaction revenues, even if the latter is improving.
While the wonderfully predictable nature of subscription revenue is undeniable, some of the world’s largest software companies are now relying on usage-based pricing, including Shopify, Yotpo, and Slack.
To justify its valuation of $ 2 billion, Siteminder will have to quickly double its revenues. The most likely driver will be usage-based pricing, but it must also increase margins and reduce acquisition costs – the customer acquisition cost (CAC) of $ 5,700 takes 21 months of customer payments to recover.
Switching customers to a new payment model is never easy, and if that’s Siteminder’s strategy, then it’s a huge gamble on the future of the business.
But if executed successfully, the expansion of the usage-based payment model could lay the groundwork for Siteminder to become one of the world’s leading software companies.