Mason Willoughby-Thomas

Nearmap (NEA) released another impressive set of results on Wednesday, with strong numbers across all of its key KPIs. Annualised contract value (ACV) growth was consistent with what the company had pre-released in January, whilst the benefits of scale manifested in healthy growth in gross margins, EBITDA and bottom-line profitability.

Nearmap (NEA) is an aerial imaging company that produces high-resolution digital images using sophisticated cameras mounted in light aircraft. Nearmap’s market-leading camera technology helps reduce the trade-off between speed of image capture and image resolution. The investment case for Nearmap rests on its ability to continue scaling its business through growth in recurring subscriptions to its vast digital photomap library.

With a largely fixed cost base, the earnings leverage within the business is significant. We watch the following key variables closely to judge the performance of the business:

  • Annualised Contract Value (ACV): this is the annualised value of all subscriptions in force at any given time and is broadly representative of expected revenue over the coming 12 months. For any highly scalable SaaS-based business, in a high growth phase of its development, this is the variable that attracts the most investor attention.
  • New customer ACV vs customer upsell ACV: Nearmap employs a ‘land-and-expand’ sales model that seeks to grow the relationship with customers over time. Whilst the addition of new customers is critical for the long term growth of the business, the company’s ability to persistently expand the subscription value per customer provides valuable information on the quality and lifetime value of the customer base.
  • Customer churn: the upfront costs of acquiring customers often overwhelms the value of subscription revenues in the early years of a customer’s life. Low churn rates are therefore critical to ensure an adequate return on investment.
  • Sales and marketing expense conversion: Nearmap target 100% conversion of incremental investment in variable sales and marketing to ACV. This ensures a reasonably rapid payback on investment of 12 months.
  • Capture costs: this represents the cash cost of physically capturing the digital image content. These costs are capitalised, and the associated intangible asset is the largest asset on the balance sheet. Nearmap’s ongoing improvements in the efficiency with which it captures content is a key driver of competitive advantage by ensuring low cost and highly current images.

Today’s earnings release once again highlighted a company enjoying significant momentum across virtually all aspects of their business. The strong ACV numbers were no surprise given the company had already pre-released this data in January, however the manner in which Nearmap is achieving its results continues to impress.

Against the key KPIs we monitor, as outlined above, Nearmap once again outperformed:

  • Investment in content and functionality resonating. Year-on-year growth in ACV generated through upselling customers into additional products was strong across both ANZ and the US. This is a reflection of the value customers are extracting from Nearmap’s products, and the deepening penetration within customer workflows that Nearmap is achieving with its land-and-expand sales model.
  • Churn rates continuing to fall. Churn within the Australian business dropped to a record low of 5.3%, a 300 basis point improvement from the first half of 2018, providing strong corroborating evidence of the value Nearmap’s customers are receiving from this product. Even more impressive has been the sharp drop in churn in the US, almost halving from 15.9% in the prior corresponding period to 8.3% at the end of December. For a business that is still in the relatively early stages of its development in a foreign market, this was exceptional.
  • Sales conversion very strong. Nearmap measure sales conversion as the ratio of variable investment in sales and marketing to incremental ACV generation. Both the ANZ and US regions delivered conversion ratios well above 100%, indicating a 12 month return in excess of $1 for every $1 invested in sales and marketing. With highly efficient use of capital in sales and marketing, more resource has been allocated to the valuable activity of content and capability development.
  • Capture program expanding into Canada. Whilst this has been flagged, more detail was provided today. Nearmap intend to commence the capture program in April with an initial target of 60% population coverage. Management also indicated their initial estimate of this revenue opportunity, outlining an addressable market of between $300 and $400 million - roughly the same size as Australia.

Investment View

After an extraordinary share price performance over the last year, and with a market capitalisation approaching $1 billion, some might question whether the shares have run beyond fundamentals. However, what we have witnessed over the past 12 months is a company with market-leading technology operating in a large, global and growing addressable marketplace that is effectively exploiting a first mover advantage. The size of the opportunity looks set to underpin Nearmap’s growth well into the future.

An underappreciated aspect of Nearmap’s business is the progressive shift towards data analytics and applications based on machine learning and artificial intelligence. At its core, Nearmap’s most valuable asset is its data, in the form of digital imagery, which can be analysed and manipulated to add richness and deliver unique insights for the end user. The ability to offer high value analysis tools and applications helps grow revenue per customer, deepens the customer relationship and further entrenches Nearmap’s competitive advantage.

Nearmap’s detractors often point to the presence of Google Maps as a long-term existential threat to their business. However, we believe this reflects a misguided understanding of both Google Maps and Nearmap. Google’s core business is the channelling of consumers to businesses using various internet-based platforms, including GoogleMaps, through the sale of advertising. As such, Google’s products are predominantly consumer-focused rather than designed as tools for business. Further, consistent with their focus on consumer grade applications, GoogleMaps uses comparatively low-resolution satellite imagery with capture rates that are insufficiently frequent and inadequate for commercial purposes.

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