It was not the best start to 2020. Just as the market's eyes were
turning to Wuhan, China and fund managers had officially returned to work from the summer break, Nearmap shares
crashed by 30 per cent on January 30.
A trading update invited fair questions around earnings visibility.
Fast forward nine months, and it has managed to
get away a $72 million raising priced at $2.77 a share, and launch a $20 million share purchase plan, in an all-in grab for growth. But the risk-reward is finely balanced, as implied by the stock's discount to technology peers.
In an emerging industry such as aerial mapping, there’s a lot of focus on the opportunity, which is large. And with the advantage of being in the software as a service orbit, the reward is obvious, and also large. Mirroring this enthusiasm, the stock
broke into the S&P/ASX 200 index in April 2019.
It's an incredible rise for a business that's no stranger to rolling the dice on strategy.
In May 2012, the Perth-based Ipernica planned to seek shareholder approval to change its name
to Nearmap Limited. This was the start of striking success for the company as Ipernica was a patent troll or, in its own words, in the "IP licensing and assertion" business. It still retains one subsidiary carrying the old name: Ipernica Ventures Pty Ltd.
Nearmap introduced a subscriber pays model to
a business it bought in 2008, and which was founded by Stuart Nixon, in a market that didn't really exist. It worked brilliantly.
High altitude
In December 2018, in a vindication of the market opportunity, US group
EagleView fully acquired Spookfish, a junior ASX aerial imagery company whose key people had historic ties to early Nearmap. By this stage, Nearmap was the clear homegrown leader; it had 10 years’ worth of imagery in Australia and three years in the US. That's about 13 years and six years in today's numbers.
Annualised contract value has become an important metric where performance is concerned: it is used by the company to report and forecast. Financial 2020 ACV was $106.4 million and statutory revenue of $96.7 million. Because ACV is a snapshot in time, it can be higher than actual revenue.
Without a 2020-21 forecast, Nearmap guides to 20 to 40 per cent ACV growth over the medium to long term, and underlying churn of less than 10 per cent.
Nearmap's downgrade following the cancellation of a contract by a partner subject to an injunction “was quite a surprise to us”, says Rob Newman. Ross Swanborough
Churn can be problematic, as investors found when two big contracts moved the dial negatively on the previous 2019-20 guidance. But that was not the only reason for the downgrade from hell. The other was the cancellation of a contract by a partner subject to an injunction. As the company’s boss, Rob Newman, told
The Australian Financial Review later in February, the outcome
“was quite a surprise to us”.
At the time, Nearmap declined to name the partner (and it was not a party to proceedings), but the trigger was a District Court of New Jersey verdict in the matter of
EagleView versus Xactware, owned by Verisk. A jury awarded $US125 million in damages in favour of EagleView upon being satisfied of wilful infringement of five patents in a decision delivered in September and October of 2019. Verisk was permanently restrained from selling a group of roof imaging products defined by the ruling.
Nearmap's relationship was on the Verisk side.
Revenue, but from whom?
As with all growth stocks that cannot be valued on earnings, subscription or recurring revenue is the main game and the more recurring the better: in financial 2020, subscription was $96.57 million of its $96.71 million total revenue.
Nearmap no longer distinguishes between the three categories of subscription, on-demand or royalty income as it did up to 2018-19; that's now subscription and royalty only. The extent of on-demand income was only minuscule.
But nor does it, for the purposes of its stated accounts, disaggregate revenue from partnerships and revenue direct from customers.
Management was asked at the full-year result in August how much ACV comes from partner channels versus direct channels. “In North America it’s around a 50-50 split between partner relationships and direct to customers,” CFO Andy Watt explained. Those partners take content and combine it with other content and sell it to an end customer. “It means that we can get to customers that we might not be able to get to.”
Judgment call
That detail was discussed in the conference call with analysts but was not in the presentation materials. (Nearmap does segment by geography and customer type.)
The relevant accounting standard governing revenue from contracts with customers, or AASB15, is complex and contains reasonably judgmental elements that evaluate four criteria being nature, amount, timing and certainty.
If nature is about type, amount would examine whether some of that revenue, hypothetically speaking, was differentiated in respect to sales price or even potentially margin. Timing relates to the point in time the revenue is recognised, which for a subscription tends to be a 12 month proposition. And finally certainty comes down to collectability.
At the moment, Nearmap's slice of the North America pie is still less than what it earns from Australia and New Zealand, or in dollar terms, $41.9 million to $64.5 million. But it stands to reason if partnerships are a part of the future strategy then to the extent that's embedded in the North American expansion, greater clarity may be welcome.
And for the avoidance of doubt, group auditor of seven years KPMG has never identified revenue recognition in key audit matters.
Shots fired
It could be said that competition is intensifying in a global market valued at $US10 billion already. In August this year, Mark Deuter, who runs
ASX-listed Aerometrex, told investors: "We have as good a resolution as Nearmap in 2D aerial imagery. I'd say our 3D product offering is far superior. And I'd say our Lidar offering is something that Nearmap doesn't have at this point."
There's every reason to infer Nearmap forcefully disagrees with Aerometrex's opinion.
In April 2020,
Aerometrex ($100 million market cap) agreed to acquire Spookfish Australia, providing also for Aerometrex and EagleView to collaborate. Aerometrex received the Spookfish client list with a licence to its aerial imagery archive for $1.5 million.
Spookfish itself was founded in 2012, and in 2014, backed by the ASX-listed White Star Resources, eventually trading as Spookfish in its own right in 2015.
Big market, small world
Incidentally, in 2014, Nearmap filed an application in the Supreme Court of NSW seeking orders that Spookfish, Simon Cope (a former Nearmap chief technology officer), Guy Perkins (a former chief operating officer) and Michael von Bertouch (one of the original vendors) provide discovery for the purpose of deciding whether to commence proceedings against Spookfish.
The court found in favour of Nearmap, but a market update in 2015 said the application was withdrawn.
Analysts prefer to value Nearmap on a blend of enterprise value-to-sales and discounted cashflow.
The $90 million September raising for the pro-growth agenda –
fully underwritten with Citi on the placement – was a surprise to some. This could be because management acted swiftly to manage costs when COVID-19 struck, and delivered a well received 2020-21 trading update from this leaner base.
Or it could be a change in narrative from August 19 (“well positioned to support our customers in this time and to continue to grow") to September 10 (“capital raising to accelerate growth opportunities”
.
Ex-chairman and current director Ross Norgard sold 15 per cent of his holding
as part of the share offering.
Battleground stock
As Morgan Stanley analyst James Bales (who rates the stock “overweight”
highlighted, the consequent issues are: dilution and credibility trade-off, earnings implications and product traction. “There are puts/takes on each, but positive on balance, due mostly to good fortune,” he said. Mr Bales has ACV hitting $202.8 million in 2022-23.
Nearmap on Friday closed at $2.32. The previous time it raised capital was in 2018: $70 million at $1.60.
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Citi analyst Siraj Ahmed (“buy”, with “patience required”
has ACV leaping to $490 million by 2029-30. Analysts broadly concur that the additional investment will pay off, but with the caveat it won’t actually see free cash flow until 2022-23, at least if Citi is right. By this milestone, it would not have had positive free cash flow for five years but it's hardly alone on that measure.
The annual roof geometry market is estimated at a $US100 million to $US200 million revenue opportunity but it’s only taking $US2 million of that today, meaning it comes down to execution.
