21/6/22 FY22 Financial Guidance Update
Been some chatter on AMX here lately so a timely update this morning. Down 65% it is by far my worst Strawman holding and that is replicated in the Fund also. That said today's update was...ok?
The concern is the guidance at a revenue and EBITDA level were both given with wide ranges (perhaps not a good sign itself given it's late June) meaning the update ranges from poor to average. In the context of the share price, I would definitely take average though.
Here is a quick snapshot of the last few halves with guidance:
As you can see, at the low end it would be a sharp decline in revenue on last year and prior half, while at the high end essentially flat. For EBITDA it will come in below the 2H21 result (which unfortunately I assumed the business could build off) but still up handily on the 1H.
Again commentary on the 3D opportunity was positive but talk is cheap in this market and we need results. The segment has a lot of potential but is very capital hungry and for a business that is capital constrained they need to see the potential coming through quickly. Commentary on the business review were again vague, it sounds as if no massive structural changes will be made but the Board will be focused on "profitable outcomes". With Donald McGurk (ex-Codan CEO) now on the Board hopefully this focus is genuine.
I see two big risks to the AMX investment thesis. The first is a clear one; MetroMap is going head to head with a massive incumbent competitor in Nearmap who is much larger and well capitalised. There are some signs AMX is making headway and it may be in their favour that NEA is focusing so hard on US expansion which may allow MetroMap to poach unsatisfied clients.
The second risk is that AMX has committed to ending their project based revenue. This is not an insignificant amount and means AMX is about to go through the same challenges many software business who have pivoted to ARR have found. Short term financial performance gets messed up as reported revenue takes a hit.
Management have stated there is $3.2m to complete largely in 1H22:
That amount is roughly in line with previous half years so numbers in the coming report may not be impacted. For 2H22 and beyond, management are expecting $1-3m of that revenue to migrate to MetroMap:
If that number is at the lower end it leaves them with a big revenue hole to fill. At the higher end project work would largely be replaced with higher margin recurring revenue which would be a great outcome. Watching MetroMap ARR over the next couple of updates will be crucial as AMX may have to win their project based clients to MetroMap vs Nearmap.
After a weak 1H21 result AMX recovered in the 2H21 to post $12.4m revenue driven by growth in MetroMap subscriptions and a sharp recovery in LiDAR work. The company reported $4.2m in normalised EBITDA but their definition of normalised is stripping out share based payments which I don't agree with. EBITDA of $2.9m doesn't seem like an exceptional result but it is worth noting that all of that EBITDA came in the 2H as AMX registered -$140k in the 1H. It was the same for FCF, a -$5.4m is a poor result, but the 1H was -$5.8m. I expect FCF to remain weaker than EBITDA for a while yet while the company builds out their asset base (they own rather than lease planes like NEA).
Geographical breakdown also shows the early investment in the US:
The balance sheet is also in decent shape with $16.6m cash at 30 June (plus $3.6m in proceeds from sale and leaseback of office space) and ~$10m in planes with no debt.
AMX breaks their operating business into three segments; MetroMap, LiDAR and 3D. MetroMap is a subscription service for AMX's database of 2D aerial imaging, LiDAR uses laser technology to scan for distance and density and 3D meshes images to create a digital model of a 3D space. AMX has hinted at bringing their LiDAR and 3D offerings into the MetroMap subscription but for now they are still project based. Management provides market share on each segment in their presentations:
With a 6% market share of the Australian subscription aerial imagery market, AMX has a long way to catch the incumbent Nearmap who has over 90% market share. That said, AMX management is confident they have a better offering than NEA and importantly competing strongly on value with a fixed subscription amount compared to NEA who charges based on usage. See my Industry/competitors straw for my take on AMX competing with NEA.
AMX are more established in LiDAR with 18% market share and have invested further in space with a fourth laser sensor and upgrading the remaining three.
Despite being conservative with MetroMap and LiDAR TAM's, management have an "open-ended" TAM for 3D largely because the space is growing so quickly. Like other technologies, as the quality of the product improves it is opening up further use cases that were previously not possible. It represents the blue sky in the AMX investment thesis and helping it is the fact AMX has leading edge tech in the space. Engineering giant WSP was an early client of AMX's 3D data and have continually scaled up as AMX capture more cities and improve their offerings:
Beyond "traditional" use cases in surveying and mapping, AMX is also selling their 3D datasets to metaverse customers who are looking to mirror the real world in a digital setting. They sold their San Francisco model to the Lunaverse project for $250k and have partnered with the Omniscape project to map various US cities to eventually be used in their metaverse. Importantly, AMX is project agnostic, they continue to own the 3D dataset and licence it to whichever metaverse projects would like to use it.
With the pivot from project based revenue to the MetroMap subscription model, AMX has put themselves squarely across the ring from the 800 pound gorilla in the industry Nearmap. The initial growth was strong, but it was always difficult to tell how much was eating into NEA's market share and how much was a transfer of AMX's own project revenue to the subscription model. The latest update in October showed a slowdown in the September quarter which management attributed to some deferred renewals of subscriptions that management expect to be taken up in the December quarter:
I will be keen to see the growth of MetroMap in the upcoming half year results to see if AMX was able to re-accelerate growth from a slow September quarter.
Trying to look ahead, Macquarie recently downgraded NEA primarily due to increased competition from AMX and website traffic does show MetroMap having a very strong January. While we will need to wait for results to get a clearer picture, I do rate Macquarie's channel check research, they were well ahead of other brokers in downgraded Appen after speaking with customers.
AMX was founded in 1980, but it's current iteration began in 2011 when there was a management buyout of the business and ownership was split among key staff and directors. The chart below from the prospectus shows KMP ownership prior to the IPO and the 50%+ ownership that remains today:
Prior to the IPO AMX was a profitable business but a combination of increased investment and Covid meant the business swung to modest operating losses since listing:
