The Constant Investor - Spookfish, page-2

Aerial imagery: Spookfish

Alan Kohler July 4, 2018 CEO Interviews


Jason Waller is the CEO of a strangely named business called, Spookfish. Apparently, it’s an actual fish that has mirrors for eyes and the reason they chose that is because this business is an aerial imagery business that was started by three people from Nearmap, which is the other listed aerial imagery business.
Nearmap’s gone pretty well. The shares have doubled in the past 12 months but unfortunately Spookfish’s shares have halved. They listed in 2015 and the shares haven’t done too well in the last 12 months partly because I think they’re not making any money yet and it might take a little while. They’re not talking about exactly when they might breakeven at least in Australia.
They’ve got a licensing deal with an American business that pays them royalties, so that’s reasonable and provides a fair bit of cash, but the Australian business is not cash positive. Jason says they’re starting to take some customers off Nearmap. I presume that’s the main aim, is to attack Nearmap, although he’s not exactly saying that. He reckons their technology is better than Nearmap’s but so far their share price is not better than Nearmap’s, so we’ll have to see how it goes there. They’re also talking about getting some business in China as well.
This is a long term investment, potentially to do with artificial intelligence as well because the idea, according to Jason Waller, is to not only deliver the pixels, the pictures of the ground, but also analyse them using artificial intelligence. I think they’re working on that as well as their American partner is in the US. But look, an interesting cheap start-up business, currently 5 cents a share and got a fair way to go, $62 million market cap.

	Column 1	Column 2
0	ASX code:	SFI
1	Share price:	$0.048
2	Market cap:	$60.005 million

Here’s Jason Waller, the CEO of Spookfish.
Jason, perhaps I could first ask you where does Spookfish come from, why that name?
A spookfish is actually a real creature, it’s a deep sea fish and it has mirrors for eyes. A key part of our foundation or product is our camera system which has a much higher productivity capture rate than traditional systems and it uses a series of mirrors and lenses to achieve that, so there’s a bit of a parallel between the actual creature and our system. Also, no one really had any dibs on the domain name so that was quite useful as well.
It’s always hard to find the domain name, isn’t it?
That’s right, and it’s memorable so no one forgets the name. People talk to us about it and it stays in their mind which is great when it comes to sales.
You’ve been with the business for about nine months, can you tell us a bit about its foundations which were back in 2014?
Sure. The company itself was really founded by three founders who have been in the aerial imagery game for quite a long time and came upon an idea for a new technology that would really change the way aerial imagery is captured and start to take it to the realms of satellite imagery without sacrificing the normal factors around locational accuracy and resolution. The company’s listed, that was achieved through a backdoor listing in late 2014/early 2015 and for the first couple of years was in R&D, but since around June last year and certainly since January this year, has moved out of that research development phase and into a commercialisation phase which is when I came on board to start to steer that growth.
What was the idea that you refer to?
Typically with imagery people are used to seeing satellite imagery. You can either achieve high resolution imagery or you can achieve it across a wide area or you can achieve it at a low cost. You can have two of those three things but you can’t have all three. Through our camera system which is a pod that’s mapped underneath the aircraft, it’s more of a line scanner than it is a fixed camera system which is the traditional bespoke systems and therefore we don’t compromise on those three variables. We can achieve wide area coverage at very high resolution and at a productivity rate that’s about three to four times what traditional camera systems have achieved in the past.
Are you comparing yourself there to Nearmap, the other aerial imagery company that’s listed?
Certainly Nearmap’s done a great job of creating the market in Australia and our three founders all came out of Nearmap as well and look to change the game and disrupt, which is very much throwaway terms that are used by a lot of start-ups. But I think they’ve actually achieved that. When I came on board I was typically sceptical to see what was claimed has been achieved and it certainly has been achieved in terms of that productivity increase. There’s not just Nearmap, there’s also the bespoke and traditional camera system operators that go out there and capture according to a contract. But our model’s a subscription based model where, like Nearmap, we capture on spec and then we’ll sell multiple times.
Can you explain to us how your system differs from Nearmap’s?
I won’t go into deep technical details because they’re covered both by our trade secrets and patent applications, but fundamentally there’s a few elements. The camera system is mounted external to the aircraft, so rather than looking at it internally and appearing down through a hole in the floor, mounting externally allows us to get a wider capture, a wider swayed. Similarly, the way the lens and the optical system works allows us to achieve better productivity with regards to overlap and thirdly, the pod itself rotates rather than being fixed and pointing straight down.
There are two camera tubes and they rotate continuously like they’re scanning the ground. All those images that are taken cover a wider area and they’re able to then be stitched together into a Mosaic that makes it seem like one seamless image of the ground.
A presentation that I read – I think it’s from April or not long ago anyway – says that Spookfish’s images are three times more accurate than competitor imagery. Are we referring there to Nearmaps as the competitor?
I won’t go into what all our competitor specs are, but yes, typically we’re three times more accurate which means that once you have that Mosaic and you overlay it on the actual earth’s surface, you need to know exactly which latitude and longitude each pixel is that you’re looking at. That’s quite a science, it’s a non-trivial complex problem to achieve that and to do it at scale. It’s achievable if you have survey markers on the ground and you have various survey points that you correlate to, but scaling that up so that you don’t need to go and survey all the areas that you’re capturing is quite difficult and that’s what we’ve managed to achieve.
For companies such as architects and civil contractors, it’s very important that when they overlay their drawings over our imagery, that its accurate to the ground truth.
How come Nearmap’s share price has doubled in the past 12 months and yours has halved, do you think?
I think Nearmap’s doing a great job and I think that reflects the stage of their growth and it demonstrates that there’s very much a market out there. In many ways this market didn’t exist 10 years ago, we’re in the early stage of development and I think we’ve moved a lot faster than others at a similar stage of that growth. I think partly our share price is looking for our proof to be in the pudding with regard to both our Australian sales and forecasts and also, we have the great advantage of a partner in The United States, EagleView, who purchase our camera systems and pay us a royalty in return. They’re coming into operation with those systems now and we’ll expect the royalties to start flowing reasonably shortly. I think the market’s looking for both those things to come together, both the Australian sales and the US royalties.
Can you explain to us what your product range is?
Our base range consists of a web service that people can subscribe to and you get to look at their maps via a webpage and there’s various tools that enable them to draw on the imagery export images, measure the size of buildings, etcetera. Those two small businesses, one to five people may be a landscape or a solar installer or something of that nature. When we start to scale up into larger enterprise and government contracts, they want the imagery delivered as a data stream and there’s various fault maps to achieve that because they use enterprise level software products, typically from Esri, Bentley and other suppliers like that to overlay our imagery with other datasets, property datasets with astral surveys, vegetation data, those kinds of things. The product scales up depending on the user themselves.
What are the prices?
For a single user looking at the web service, it’s approximately $1,000 a year and they can pay that monthly or annually. If they pay annually, they get a benefit. For the enterprise customers, it really does vary in range from contracts that are around the higher four-digit mark to five digits and then even into six. It scales depending on the number of seats and end-users they have, because a key part of our offering is we don’t limit users on data, we just simply charge them by the number of seats they have in their organisation. They’ll pay an establishment fee and then a fee based on the number of their users.
On your website there seems to be four options. There’s SiteView, then there’s OrthoConnect, OrthoFlex and OnDemand. Are the Ortho things quite different or perhaps you can just take us through what those things mean?
Sure. SiteView is what I described, the single web viewer applications. Our Ortho products are where we also couple that with the data stream that I talked about so that the data is delivered straight to the service of the organisation and our customers. Then we will have combinations of those services. For a customer that also wants to have the ability to look at the imagery in the field through either laptops or tablets or various other mobile devices and they’ll want a combination of the data stream and the SiteView product which is where we have the OrthoFlex products.
How many subscribers have you got?
We have over 3,500 users at the moment. Our subscription base is growing rapidly with our capture program. We really only started capturing in earnest in January this year. We’re a Perth based company and we’ve captured Perth multiple times, but we’ve now also captured Melbourne and Adelaide and are well on our way through Sydney and have started Brisbane. Our subscription base is ramping up with that capture program which ultimately we intend to be capturing each of those major capital cities four times a year.
Just looking at the quarterly to March, it showed sort of $8.37 million in receipts, $6.97 million in operating costs and product manufacturing costs and you’ve got some grants as well so you’re kind of cash positive in that quarter. Has that improved in the June quarter?
With our quarterly statements, they really are compounded in terms of understanding them by the overlay of EagleView’s cash payments to us. As I said, EagleView is a major partner in the US, they pay for the camera systems and also cover some of the cost of development, so it can be rather lumpy. I look at the business through two lens as both the EagleView business and also Australian sales. With Australian sales we’re still cash flow negative but that’s growing rapidly with a credible path becoming cash flow positive in the next few quarters or half-years.
I think you’ve got a whole different strategy for Australia and the US, haven’t you? You’re selling direct in Australia but as you say, through EagleView in the US. Have they got an exclusive licence for all of the US perpetually?
It’s not perpetual, there is a contract term, but they do have exclusivity over North America. It’s a great approach, it’s been a fabulous partnership for us, it’s a capital light approach. They pay for the camera systems and the manufacture of those systems and they pay for some of the development. Then in return they pay us a royalty based on the number of square miles they capture and also the potential revenue growth they achieved. Because at the end of the day for both Australia and the US, it’s not about imagery. I think it’s going to become more and more about analytics through AI and machine learning.
Someone looks at the image not to look at the pretty picture but to make a decision about something they want to understand on the ground, typically regarding a capital asset. EagleView has a very strong pedigree in machine learning and we’re developing that here in Australia and I think the revenue growth of both companies will be very much tied to that trajectory.
You’re developing your own artificial intelligence and analysis of the images, are you?
Correct. We’re doing it in a way that I think the best approach is to partner with others. My aim is to be a seller of pixels. There are a multitude of ways that our pixels can be analysed and there are very, very smart teams in companies that are looking at bespoke verticals whether it might be through looking at building outlines or road centre lines or particular pitches on the ground, counting cars in car parks… This is all being led by satellite at the moment but satellites have a limitation because they can’t get the resolution that really provides that next layer of value to our customers. If you’re counting cars in a Walmart car park that gives you one level of detail, but through aerial imagery we can tell you the make and model of the vehicle.
Our approach is not to become an expert in every single one of those end-use cases, but to make it easy on partners to access and analyse our pixels because the strength of AI is in the training dataset and being able to label and annotate and drive that machine learning through having a strong training dataset, that’s key. The more ways I can get our pixels out and into the market through AI, I’ll achieve that by making our APIs more accessible and working with key partners in those verticals.
Can you tell us how the business model works, leaving aside the EagleView one, just looking at the Australian side of things? I mean, usually with subscription models once you get to breakeven it just falls to the bottom line, is that the way it’s going to work with you?
Correct. The aim here is to build up a number of key contracts typically with Government and large enterprise that underpin the capture program itself and from there everything else, as you said, just goes straight to the bottom line, so therefore it results in a very high margin business, typical with other SAAS business models.
How big is the market, do you think?
It’s hard to tell because it’s developing and changing, but for aerial imagery itself I think we see figures of around $250 million and I subscribe to that sort of figure just as a pure capture of inventory addressable market. When you start to overlay analytics and machine learning, I think there’ll be a multiple. The traditional users of inventory have been those industries that I’ve described construction, Government, architects, surveyors… Those industries that want to save on a site visit. Beyond that point with analytics I think it will start to grow and become core to finance, business, real estate and those markets where they want to be able to predict the growth of capital and extrapolate into the future.
Just taking the car park counting example, if you can count cars in a car park and work out to some degree what the consumer spending’s like for a single entity, you don’t have to wait until their quarterly or half-yearly reports, you’ll have up to date information and I think we’ll see banking and finance who are already starting to tweet onto this, start to use those indices that you can create and correlate it with existing indices. Again, punch that into a machine algorithm to find out what the regression between these previously disparate datasets look like.
Too bad if they’re underground car parks?
[Laughs] You can only do so much at the end of the day!
[Laughs] Well, that’s interesting. Are you beginning to take customers off Nearmap?
We certainly have and in our early sales growth that’s going to occur. I think our competitors will naturally respond to that, they’re not going to stand still…
Are you undercutting them on price?
No, I don’t think so. I don’t want to get into a race to the bottom on price. We have a product that’s higher quality and we have a commercial offering that’s different. I think the market is large enough for both of us to be truthful and I don’t think it’s a case of one or the other. My message to your investors would be to invest in the segment, invest in big data and invest in that growth.
There’s a mention in one of the presentations about a memorandum of understanding concerning China. Can you explain to us what’s going on there?
Certainly. We have an agreement with Dr Vincent Tao who came from Microsoft originally and is a very successful technology entrepreneur. They’re assessing our imagery and our camera systems for use in China which is obviously a very large market. With those kinds of overseas growth prospects, I think they’ll be a slow burn for us as we work through the opportunity itself. It was great in The United States because we had EagleView who is a large player in the market. We’re looking for people to either have a similar presence or be a consolidator and I think in China we’re looking at consolidation of the market rather than a single large player.
Just back on Australia, you’re saying that you’re close to breakeven, can you give us a bit more detail on that? Because it’s difficult, as you pointed out, from your quarterlies to figure out what’s going on in terms of EagleView versus Australia. Can you give us an idea of what the Australian revenue is and what it needs to be in order to breakeven?
Yeah, just to clarify there, Alan, I didn’t say we’re close to breakeven, I said we’ve got a credible pathway to being breakeven in the coming quarters and half-yearlies. It’s early days yet and I’m reticent to give exact figures simply because, as I said, we’re still ramping up. To extrapolate from our current growth and to have a credible figure stand behind in terms of our Australian sales and therefore timing on breakeven, it’s too early to tell. That said, our current cash position is reasonably strong, but it’s something we keep an eye on and that the board considers regularly.
But are you one year off, two years, five years off breakeven, or what…?
Well, I don’t think two years to five years is – I think that’s a bit further out. I think we should be targeting achieving that before those kinds of timeframes, and as I said, we have credible pathways to doing it.
Should investors see your business as a global play, is that how you’re seeing it?
I think they should see it as a big data play. Certainly, we have that global reach through our overview partnership which is capital light. We have a lot of interest from other global regions but there’s also growth vertically through big data and as I said, through analytics. That’s the real investment. If you consider the analogy with GPS, it once was a black box that sat in our aircraft and vehicles. It’s now something that sits in our pocket and is used ubiquitously in our lives. I think the data off aerial imagery will follow the same trajectory.
Tell us a bit about yourself, Jason. You had, I think, five years with QR National and Aurizon, and then a year with GE. Tell us about your own expertise, what you’ve been focusing on.
I’ve had a pretty non-traditional career I guess. I started off as a pilot in the Air Force. I spent 22 years in the RAAF and flew surveillance aircraft in the RAAF, so I fundamentally understand the applications of this technology and in fact, I think it could equal to or better some of the military technologies out there and we’re in active conversations in those markets at the moment as well. I flew aircraft and commanded our task force in Iraq, so I saw the applications for aerial imagery and I saw how it becomes what we call a force multiplier when it’s combined with analytics and intelligence overlays.
I got out in 2008, 10 years ago, and worked as a state operations manager in the security industry. Then I became a Project Director and General Manager for what was QR National and then became Aurizon just post their IPO. I had a lot of capital project expertise that I’ve brought to this business because in many ways managing our EagleView partnership is managing a project for camera development and systems engineering, so that’s quite familiar to me. With General Electric I was the Sales Director for Asia-Pacific and that’s pretty critical because as I’ve described thus far, driving sales momentum in Australia is critical to us achieving our cash flow positive point. That means that all the analysis we’ve done with the market or strategic sales strategies we’ve developed need to actually become opportunities and closed deals and that requires quite a high degree of discipline. They reckon companies particularly like GE are very thorough and robust with the discipline they bring to sales and I’m trying to drive that through our business as well.
And tell us about your team, were you happy with the team that was there when you started last year?
It’s an outstanding team, very happy. We’ve made some organisational changes, principally to ensure that I can understand our costs and revenue from both an R&D lens, an EagleView lens and Australian sales lens, so I’ve made some organisational changes to ensure that all those elements that were melded together as one sort of large science project before have been drawn apart a bit so that we can focus on each of those things individually. The founders have done a great job building up the business and preparing it for its commercial approach. My job is just to make sure that we’re working across those individual streams in a way that has some business rigour, rather than just working on what’s necessarily exciting and good and bright and shiny. It has to have a fundamental business case that sits underneath it for us to put our resources and attention towards it.
EagleView owns 12% of the business, do the founders still own much of a share?
Yes, I think the founders and management still have a substantial portion, it’s over 10% I think from memory the last time I looked at it. They’re heavily invested in the business and the business success will drive their personal success.
That was Jason Waller, the CEO of Spookfish.