Ann: Half Yearly Report and Accounts, page-85

NEA's trading accounts can be usefully considered as Revenue, Cost of Sales, Technology (R&D), Corporate (Admin), and Sales & Marketing. I put Sales & Marketing last, because I want to dwell on it at length. The metrics below reconcile to the $11.934 million pre-tax loss. Because I had ignored small items like currency losses and rounding, I rammed $1.628 under “Other” to reconcile. The $22.7 for Technology and the $17.7 for Corporate both come from the Cash Flow report on Page 29 of the Presentation, which is why they are rounded more.

. ACV . Revenue .. COS ... Gr Prft ...Tech ... Corp . Sale&Mkt . Other . Loss
147.684 .. 67.55 .. 16.369 .. 51.181 .. -22.70 .. -17.70 .... -21.87 .. -1.628 -11.934
% of Revenue .... 24.23% ............... 33.60% .. 26.20% .. 31.22%

1. Revenue

Revenue growth has tracked well in North America, and I expect better growth in ANZ as AI applications occasion upsell. Australian experience informs us that North American revenue will flatten within the decade, or less, other things being equal. New initiatives such as AI applications and geographic expansion,will cause other things not to be equal.

Geographic expansion is, likely to be opportunistic, and profitable early, because it won't be done in the big-bang way that NEA got into the USA. A customer like CoreLogic, a global property intelligence company, could induce NEA to enter new geographies in a stepping stone manner, and this seems to be currently under discussion, so the first step may be soon.

2. Cost of Sales (COS)

As NEA is a spatial-image business, the Cost of Sales (mainly data capture) is what it needs to exist as we know it. COS is well managed. If NEA extracts more value out of its captured images, the COS/Revenue ration can get to a single digit percentage, and the law of diminishg returns tells that extra effort to lower capture costs may be better spent elsewhere.

Efficacious data capture was seminal to NEA's birth, and Rob Newman's academic background gives him an affinity for the technology, so this is one area where “lean management” is evident. Efficacy was there initially, and the income generation was built around it later

3. Technology

Technology expense is an on-going necessity to enter sticky markets early, and to avoid market disruption in the longer run. I have no problem with this expense, and I suspect its percentage of Revenue will reduce, but it could always be a significant expense. Esri spends more than 30% of its annual revenue on R&D, and it has been around for decades, and it holds 40% of what it regards as the relevant global market.

4 Corporate

Intuitively, I feel that there is fat in the Corporate expense. One would have to poke around to find what could usefully be pared. I do not think that the expensive premises are used because of Covid, so there is a start.

5, Sales & Marketing

I suspect that Management are going to stick to “more of the same” and the efficacy of the Sales & Marketing spend may remain poor for years. I hold this view because corporate targets are substantially focused on incremental ACVs, and not the expense of achieving the increment. 60% of the short-term incentives for NEA's directors and key management personnel are based on incremental ACVs, and much of NEA's rah-rah is focused on incremental ACVs, but I cannot recall that much was said to suggest “lean management” applied to the Sale & Marketing function. Lean management requires deliberately engineering effectiveness on a fundamental basis – not just penny pinching at the edges as an afterthought.

In the 1970s I was involved in the development of a business for a computer service bureau. From the beginning the application was designed to be profitable at volume, rather than merely meeting the functionality required by the potential market. The application was designed to be operated at low marginal cost, so when we shovelled new customers on board, the installation cost was low enough for us not to worry that the customer might discontinue using the service prematurely. Consequently, to obviate the prospective customers' fear of spending money on a lemon, we neither sought contractual commitment for any period of service, nor ask for non-refundable prepayments. The instrument of acquiescence (it could hardly be called a contract) allowed termination at will, but 99% of the customers used the service for many years.

Because it was easy to negotiate low-commitment deals, and we never experinced early terminations, the sales reps who sold the service did not have to be top guns, and they could be quickly taught what they needed to know, so they were paid lower base salaries than the other reps in the company, and the commission on expected revenue was set at half the rate that applied to the company's other application-based services. My 59527016 post mentioned this issue, and that NEA can have two sales paths – the current one, and an easy-entry low-commitment path that, via base charges, requires sufficient commitment to discourage the tyre kickers.

One could write a multi-page thesis on this topic, so an HC post does not do it justice.