JCap short report released, page-140

Just reading the Evans and Partners report shreds Jcap and says buying opportunity. I think this could backfire spectacularly and turn into a short squeeze assuming NEA response is similar to Evans but with a few more recent tidbits.

Nearmap has been sold off sharply following the release of a negative report from JCapital Research (authors of reports on SEK and WTC). The report mainly containsopinion and is light on hard hitting evidence. We view the sell off as a buyingopportunity.Valuation/Margins The report claims the bull case for NEA is based on it replicating it’s Austshare (~60%) in the US. We are bulls on the stock, but our forecasts imply ashare of only 12% in FY27. The reports stats that GP margins in the US have been falling because“competitors are crushing them”. It’s true that reported GP margins fell inFY20, but it was entirely due to the change in policy for amortising capturecosts (from 5 to 2yrs).Accounting There are accusations of aggressive accounting. We disagree. The market looks at free cash flow, so whether capture costs are included inoperating cash flow or in capex isn’t particularly relevant. We are under noillusions that NEA has been negative FCF since 2015 and will remain so until2024. Capture costs are capitalised and amortised over 2yrs. This was originally5yrs, but as a result of the change to a shorter period amortisation andcapitalisation will be matched in FY21. Contract liabilities (i.e. unearned revenue) relative to revenue is changing withthe business mix and evolving distribution strategy (see Nov-20: Shoutingfrom the rooftops) . More contracts are being sold on the basis of multipleyears or are usage-based (e.g. GAF & CoreLogic in Roofing). To illustrate, reportedACV in FY20 was $106.4m, but revenue to be booked in Yr1 is $64.5m.Technology Claims that NEA cameras are inferior and less efficient are not convincing.NEA flies at higher altitudes and is able to capture a greater area with eachpass (the next Gen cameras will fly even higher). The cameras are easier touse/modify because they sit inside the aircraft and photograph though awindow flush with the underside. Eagleview/Spookfish cameras are encasedin a pod that is attached to the bottom of the aircraft, requiring FAA approvalbecause they change the aerodynamics. The image included in the report doesn’t add a lot. Flying at a higher altitudecaptures the same area as an aircraft flying lower. Furthermore, if you’recapturing images on 90 degrees the pilot is already in Elysium.Roof market The $100m plus market has long been dominated by Eagleview prior toNEA’s arrival. Despite the opinion of an unknown number of unidentified users that Pushpin(acquired by NEA) technology is ‘poor’, NEA is powering a white label roofreporting product for GAF (largest US roof material company), CoreLogic andrecently to Scope Technologies under a revenue share agreement. Both GAFand CoreLogic defected from EV. Margaret Thatcher would have a field day on the sources (“tell me who andwhere and when…?).https://www.youtube.com/watch?v=imWJZQQvP1w The turnaround on GAF’s QuickMeasure service is 1 hour for single-familyhomes and 24 hours for multi-family and commercial. The claim that EV’s turnaround is 2 hours is misleading. This only applies toits basic QuickSquares report (an approximate square footage of a residentialroof). Its Premium Roof measurements report (equivalent to the NEA offering)takes up to 48 hours unless 3-hour express delivery is purchased on top. NEA has been upfront that roofing measurement, as are its other new AItools, is not yet a fully automated process. Incidentally we have heard similarindustry ‘suspicions’ that EV is a mostly manual process. That the websiteFAQ stipulates express orders received at 5pm will be delivered by 8am thefollowing day supports this.Government Much of the report focuses on its failure to capture share in the Gov’t sector. Itis based on interviews with just 10 counties (out of 3,006 across US), and onlycites a lack of geographic coverage as a deficiency relative to EV. Of the fourmajor counties highlighted, three have some of the lowest populationdensities amongst the largest US counties. This is no revelation. NEA’s strategy has always been to prioritise imagequality and capture frequency over breadth of coverage (currently ~70% of USpopulation). Logically it follows the company target densely populated urbanareas to maximise return on capture spend. Where JCAP views this as‘conserving cash at the expense of revenue’, we see this is as prudentlyoperating at the point of profit maximisation in a competitivemarketplace. Demand-driven revenue arrangements (e.g. GAF, CoreLogic, postcatastrophecapture program for insurance clients) allows for a flexible capture programto be expanded relatively quickly at a flat marginal cost. Likewise a ‘land & expand’ approach with lower initial rates with a goal to‘upsell’ features with time seems entirely sensible when introducing new,disruptive tools to a market. Traditionally county administrators have mostlyrelied on ad hoc, custom collection contracts for specific GIS requirements(such as the multi-year consortium contracts noted by JCAP). In recent yearsthere has been a migration to licensor-type imagery providers, forgoingownership of data to benefit more frequent captures, better resolution andspatial accuracy. It should come as no surprise that certain Gov’t functions, such as propertyregistry and tax assessment, do not fully utilize the premium content offeredby Nearmap. Indeed, the rationale of the company’s R&D programs (AI & 3Dcapabilities) and M&A (incorporating geometry extraction tech acquired withPushpin) has been to add value to its core imagery service, and createcompetitive separation from the various low-cost satellite imageryproviders (eg Google, Maxar, Planet) In the Gov’t sector, NEA’s technology is applicable to a wider range ofspecialised use cases relates to environment/ city planning and infrastructure/asset management. One example we note is its partnership with Cityworks(GIS data management platform used by 700+ utilities/ governments globally).The high-resolution imagery allows for surface inspections of roads and pathsto arrange maintenance work (e.g. cracks, potholes, lane markings), or trackinventory and condition of public spaces (e.g. benches, chairs, bins, lighting,playgrounds, shading in leaf-on/ leaf-off seasons). According to JCAP, this sector space represents ~20% of the US aerialimagery, estimating NEA’s share at 7% compared to 80% for EV. That Gov’talready represents 24% of North America ACV highlights NEA’s growingtraction in these higher-value niche areas.Ex-employees The report lists several disparaging comments from former employees onGlassdoor (or is that Glass-jaw?). The key word here is “former”, and NEA isnot alone in being bagged by disgruntled ex-employees.CheersJulian and KieranJULIAN MULCAHYExecutive Director - Small Caps, ResearchP +61 3 9235 9713M +61 402 288 481W eap.com.auPart of the E&P Financial GroupMayfair Building, 171 Collins StreetMelbourne VIC 3000KIERAN HARRISAssociate - Small Caps - EAP ResearchP +61 3 9235 9749W eap.com.auPart of the E&P Financial GroupMayfair Building, 171 Collins StreetMelbourne VIC 3030