I have been considering the Eagleview situation over the last 36 hours and my gut feel so far is that there is unlikely to be merit behind Eagleview's claims. In fact, I suspect the action taken by Eagleview is likely a positive signal for Nearmap, indicating that Nearmap has been sufficiently successful in the North American market that Eagleview feels it needs to act beyond simple competition.
I set out yesterday morning to answer a few questions:
1. Is there likely merit to Eagleview's claims?
I believe the answer to this is "no". I am not a patent examiner nor IP lawyer so I am basing this on the following facts:
Knowing the above, I can only think of two reasons Nearmap has developed and continues to grow its roof geometry service. The first is that they did so in full knowledge that Eagleview would likely come after them at some point (this is confirmed in SA1588's post on HotCopper) and that they are comfortable they have implemented their roof geometry product in a way that does not infringe on Eagleview's IP.
An alternative, more cynical view, is that Nearmap went ahead with the roof geometry business either negligently, or with a cavalier attitude, or simply out of desperation to replace the Verisk business.
I'm discounting these 3 possibilities because prior to acquiring Nearmap, the Ipernica business specialised in IP assertion (more commonly referred to as patent trolling). Ross and Rob were both part of that business so they are well aware of how it works. I also feel that I know Rob well enough to know that he is not negligent, nor cavalier, nor a short-term thinker. He has been with Nearmap since its beginning in 2008, and the multi-year, multi-million dollar investment in Nearmap's ML/AI products which has been slow to generate revenues thus far is proof that this is not a short-term thinking business. Nearmap continues to expand that team today (as proven by the job ads Birdman frequently finds).
2. If there is not merit in Eagleview's claims, then what are Eagleview's motivations?
I think the filing is a sign that Nearmap is taking share from Eagleview. Eagleview is frustrated by this, and even if they fail with their patent claims, they can cause reputational damage to Nearmap in the meantime. This case could drag on for years (a reminder again that Eagleview vs Verisk played out over 4 years), and during that time you can bet that Eagleview's sales folks will be out in the market warning every customer that Nearmap may not be able to provide ongoing service if Eagleview wins its case. Furthermore, there is likely information that Eagleview can learn from Nearmap during the legal process (i.e. how Nearmap has implemented its roof geometry service).
From Eagleview's POV, even if they ultimately lose the case, there are benefits to running it, and presumably they have decided the benefits outweigh the legal costs. Slide 11 of Nearmap's most recent presentation indicates the roofing business is ~US$3m ACV. If Eagleview can cast sufficient doubt and potentially win some of that back or prevent further losses to Nearmap, and have the opportunity to look inside Nearmap, it seems a sensible move on their part.
3. What action should I take?
I come to the conclusion that the action by Eagleview is entirely rational on their part, despite it likely having no merit.
I think what this means in the short term is there will be cost incurred by Nearmap to defend itself, as well as potentially more difficult sales in the roof geometry related sectors which is clearly negative.
In the medium term, I think Eagleview's action actually tells us that Nearmap are onto something good and we simply need to wait for the case to play out, I believe in Nearmap's favour.
Therefore, as a long term investor, I will do nothing. I considered selling to avoid some of the paper losses that are very likely in the short term, however the issue with that is I like the business in the medium-long term. Suppose I sold at $1.85 today, what would be my signal to re-enter?
The market reaction is to perceived risk. When does that risk expire? There are a multitude of possible outcomes - Eagleview could simply drop the case 3 months, 6 months, 15 months from now. Or it could drag on for years.
My position on timing is simply don't. I only hold 3 high conviction shares so for me the appropriate strategy right now is simply do nothing, on the assumption that this will resolve positively in the medium term.
If one was to have a little faith in Rob and team, one might think that they would have anticipated this and considered how to deal with it when it happens.
Front the AFR
Street Talk understands the “potential legal proceedings” that forced Nearmap to halt trading of its shares on Wednesday morning are being brought against it by US-based rival aerial imaging outfit Eagleview.
While the details of the legal proceedings are unclear, it’s something that was on investors’ and analysts’ radar.
Short seller J Capital flagged a potential issue in its Nearmap report, published earlier this year.
In that report, which contained plenty of claims that were batted away by Nearmap, JCap said the Aussie company was “in danger of losing its toehold in the U.S. insurance segment to an intellectual property challenge”.
Nearmap derives about 41 per cent of its North American sales from roof reports for the insurance sector which use them to assess damages claims caused by wild weather events and the like, according to JCap’s report.
However, JCap reckoned Nearmap’s roof reports could be infringing on Eagleview patents and, if legally challenged, “it may be required to pay a royalty to Eagleview, find a different way to do a map, or stop producing roof measurements and roof reports altogether in the US”.
It seems that legal challenge has now landed.
Nearmap requested its shares be halted until Friday. The company said the halt was to “allow the company to respond to the potential legal proceedings”.
Nearmap’s trading halt came as its shares were on tear on Wednesday morning, up 14.6 per cent to $2.36 thanks to an after-market trading update on Tuesday afternoon.
Nearmap upped its fiscal 2021 annual contract value guidance in that update, to between $128 million and $132 million, from $120 million to $128 million. The company said the improved guidance was due to “strong 1H21 performance”.
Short interest in Nearmap peaked in January last year at about 14 per cent of its issued capital, and was sitting at 2.67 per cent on Wednesday, or 13.2 million shares, according to Shortman.
Claude Walker's take on Nearmap's results here
I tend to agree with most of this.
When looking at the bear arguments, the issue of outright accounting fraud isn't one i give a high probability to. So i'm going to assume the reported numbers are accurate.
Bear's say NEA is guilty of capitalising way too much capture and development costs to the balance sheet, and being pretty optimistic with amortisation rates. That was definitely true at one stage.
But after agitation from shareholders this policy has been greatly improved. Although, I admit that it could still be a lot better.
Practically, i think it just means that it's sensible to heavily discount the true value of intangibles on the balance sheet, and to increase the true operating costs of the business when making an assement. And given the reported growth and increasing margins, these costs are more comfortable.
Overall, I thought the response to the short attack was reasonable.
At a point, unless you have real first-hand experience with NEA's offering and that of its competitors, it's a bit of 'he said, she said' in terms of product strength and market fit.
But the very decent rate of ACV growth, especially in North America, certainly offers a lot of solace.
I tend to remain favourably disposed towards Nearmap, but as you'll see on my valuation I dont think it's any great bargain.
NEARMAP RESPONDS TO ERRONEOUS SHORT SELLER REPORT
Nearmap Ltd (NEA:ASX) is aware of a recent report by short-seller firmJ Capital Research Limited (“the Report”). The Report contains many inaccurate statements and makes unsubstantiated allegations of a very serious nature.
The Report was created without prior consultation or discussion withNearmap and follows a pattern of overseas domiciled funds making speculative claimsin order to generate uncertainty through adverse publicity and directly profit fromsuch claims. Nearmap has reviewed and rejects the Report.
The consistency and fullness of Nearmap’s market disclosures ensures market participants have a great deal of information against which to assess the merit, or lack thereof, of claims such as those in the Report. Nearmap is in compliance with its continuous disclosure obligations and the Company remains highly confident and committed to its long-term strategy and outlook.
Nearmap does not wish to engage in detail with each individual erroneous, self-serving and unsubstantiated opinion contained within the Report and therefore will only focus on addressing the Report’s key factual misstatements(“False Claims”)
Nearmap Ltd (NEA:ASX) is aware of a recent report by short-seller firmJ Capital Research Limited (“the Report”). The Report contains many inaccurate statements and makes unsubstantiated allegations of a very serious nature. The Report was created without prior consultation or discussion withNearmap and follows a pattern of overseas domiciled funds making speculative claimsin order to generate uncertainty through adverse publicity and directly profit fromsuch claims. Nearmap has reviewed and rejects the Report. The consistency and fullness of Nearmap’s market disclosures ensures market participants have a great deal of information against which to assess the merit, or lack thereof, of claims such as those in the Report. Nearmap is in compliance with its continuous disclosure obligations and the Company remains highly confident and committed to its long-term strategy and outlook. Nearmap does not wish to engage in detail with each individual erroneous, self-serving and unsubstantiated opinion contained within the Report and therefore will only focus on addressing the Report’s key factual misstatements(“False Claims”)
Nearmap Ltd (NEA:ASX) is aware of a report published yesterday which commented on aspects of the Group’s performance.
Nearmap will provide a response to this report on Monday, 15 February 2021. As such, Nearmap will also bring forward its 1H FY21 result to Monday, 15 February 2021 (from Wednesday, 17 February 2021 as previously announced) and will hold a result briefing at 09:30 AEDT.
Participants wishing to attend the briefing will need to pre-register at the webcast link below
Webcast link: https://event.webcasts.com/starthere.jsp?ei=1421321&tp_key=7ad9530070
The report is quite scathing. I've been a long time, and at times frustrated invesor, and was waiting for this weeks report to decide whether or not to hold or exit this holding. The share price is going to be smashed when it comes out of the trading halt. NEA will scramble to make this sound better. Their results better be strong to overcome a report of this nature. I hold shares in SEK and it was scalded by a shorters report a short while back, but it replied to the charges and since then has seen it's shares rise from $20-$30. Fingers crossed, but I've been concerned with company for a while now. I'm not feeling positive. Fingers crossed is not a good investment strategy.
Trading Halted til Mon 15th Feb
The Trading Halt is requested in connection to a report released by J Capital Research USA LLC (Report)
Heads up to Rapstar for posting "The Report"
JCAp Short report is here. You have to click not Australian resident to see it.
Report claims include these:
1) Nearmap technology inferior to Eagleview (spookfish tech), resulting in higher imagery costs.
2) Eagleview has 44% of US market share vs Nearmap's 5% and lack scale to compete.
3) Former chairman selling 50% of shares over last 12 months.
Nearmap is a leading player in a fast growing industry, with some meaningful competitive advantages in historic data sets, capture efficiency and analytics.
Revenue has been growing at ~27% in recent years, aided by a successful push into the US market. And there's a long way to run here.
That being said, the business is still loss making having ramped up costs to accelerate growth. Something that has taken another step change with a recent capital raise.
Personally, I think they capitalise too many costs (although have recently accelerated the amortisation of capture costs from 5 to 2 years), and think investors are better off focusing on NPAT as opposed to EBITDA.
Nevertheless, the business is now very well capitalised (will have >$100m post raise) and has an attractive model. Provided NEA can eventually stablisise costs and unlock some operating leverage, while maintaining strong top line growth, i think there's a good long term opportunity here -- although i'd hardly call shares cheap.
Capital raising - 10 September 2020
The stated purposes are the usual accelerating growth. Of particular note is the rollout of HyperCamera3 which allows higher & faster flying meaning increased coverage, in their words "geographical expansion". Unclear if they are teasing new geographies, or if they mean simply greater coverage around their existing territories.
Overall I'm comfortable with this raise, mostly based on my history with Rob.
In context, they raised $20m @ 70c in late 2016, $70m @ $1.60 in late 2018, and now $2.77.
They have been clear and consistent in their stated use of funds, ramping up sales & marketing each time and allowing STCR to get back to 100% before going some more. I think that's as prudent as you can get -- basically apply more capital for as long as you can keep accelerating growth.
The one blip in their track record was December 2019/January 2020 period when they had the 3 big churn events in the US, and also increased churn in AU. There wasn't a lot they could have done about the US and I believe they've addressed the AU (loss of focus) issue.
As with previous raises, some smaller shareholders are frustrated that no prior indication was given of an upcoming raise. In particular the business was on track to running to "proper" cashflow breakeven and many interpreted that as "no need to raise capital". But as explained above with the STCR, if you can apply capital to accelerate growth, and the TAM is huge, you should do it.
This same pattern occurred in the 2018 raise. The business had pretty much reached cashflow breakeven and they tried to point that out in the halves following the raise by splitting out costs pre-raise vs the increase in costs post-raise used to accelerate growth.
I understand the frustration of a lot of shareholders because new funds are always being applied so it's never been possible to compare like for like and see that the business has been or is clearly profitable. Superficially it looks like costs keep growing and therefore the business may never actually reach profitability, necessitating perpetual capital raises, when (at least in my mind) the reality is the other way.
Capital Raising to keep the business going WOW what a suprise here. hence I now got myself 2 share accounts (wife and I) for such SSP like NEA and APT every year.
Nearmap is raising $70m through an institutional raise, and up to a further $20m through a shareholder purchase plan (SPP).
This will involve the issue of at least 26m new shares, or 33m if the SPP is fully subscribed. That's a ~7% increase to the total share count.
The reason is to "accelerate growth opportunities" which basically means increased Sales & Marketing (especially in North America) and development costs. With a minimum of $105m in cash post-raise, NEA also said the raise will give them a lot of strategic "opportunities in a dynamic market", which I assume means potential acquisitions.
It's worth noting that Nearmap capitalises a lot of development and capture costs, and last year reported negative $37m in free cash flow. That's a deterioration from the previous year due to a 47% lift in operating expenses. So although it wasnt highlighted in the announcement, i dare say a good portion of the capital will be used for working capital.
To wit, Nearmap said the cash balance at the end of FY21 is expected to be between $32-35m. Put another way, the total value of the institutional raise will be spent in less than a year.
As always, whether this is a good or bad move depends on the Return on Investment (ROI) they can get on this capital. The business has achieved 27% compound annual growth in Annualised Contract Value (ACV) in the past couple of years, and US subscription revenue is already twice what it was in Australia & New Zealand at the same stage of maturity. There's defeinitly very solid sales momentum, and the market opportunity is large and growing. Nearmap appears to be very well placed competitively.
I like the tech and the offering and think top line growth will remain strong for a good while yet. But although the scalability of the business model has been touted for many years, we're yet to really see that realised in the financials due to an ever growing cost base. Granted, these increased costs have helped underpin very solid top-line growth, but at some stage -- hopefully sooner rather than later -- we really need to see expenses stablise and the operational leverage of the business unlocked. At the very least, it'd be good to see them move much closer to a positive free cash flow position.
It's also worth noting that a good deal of growth is already assumed by the market. Based on the raise price of $2.69, the company is valued at $1.3 Billion -- over 12x the ACV.
Still a bit too rich for me.
[disc. I don't hold on Strawman, but have a small parcel in my real portfolio that was purchased in 2015 and mostly sold down in 2019]
Details of the raise here.
FY20 Full Year results - 19 August 2020
ACV came in at $106.4m, at the upper end of their $103-107m range provided on 28 May (when they were already >$102m ACV).
This seems decent enough given their churn issues in December/January and COVID-19.
Of note, the STCRs for US and AU which are historically around 100% were down to 34% and 58% (US) and 69%, 79% (AU) for H1 and H2 respectively. This reflects both the churn events, loss of focus in AU, and addition of new sales staff in US.
Also noteworthy is the Trade Receivables have grown significantly. Image attached. There's roughly $2.6m in receivables >30 days old, vs $550k at 30 June 2019.
Looking ahead, my best guess for 21H1 ACV is:
1. AU: $68.5m (+$4m)
2. US: US$33.4m (+US$4.7m)
This is based on the following assumptions:
1. Direct sales cost remain constant (as indicated by commentary today saying they expect costs to remain roughly stable)
2. STCR improvements: AU improves from 79% to 90% and US improves from 58% to 70%.
I believe these are reasonable assumptions as the AU STCR had been affected by sales leadership being stretched globally, and we now have Jeff Adams in the CRO position. And US improvement to come from the team gaining experience and operational improvements.
So I'm confident we'll be properly* cashflow breakeven by Dec 2020 assuming no external explosions.
*- Nearmap achieved cashflow breakeven at 30 June 202 through the cost cutting measures taken in April. Properly cashflow breakeven means reversing the April compensation cuts.
The provided outlook is for closing FY21 cash balance of $32-35m is where we are today. Which is to say that they expect to ramp up spending again early next year.
All in all I think it's quite a positive report other than the trade receivables which could dent ACV by ~$1-2m.
Nearmap has achieved an Annualised Contract Value (ACV) of $106.4m for FY20, up 18% on the previous year.
This was a combination of a 7% lift in subscriptions growth and (encouragingly) an 11% lift in average revenue per subscription.
Statutory revenue was up 25% to $96.7m.
However, a big increase in capture costs and an increase in their rate of amortisation saw a drop in gross margins. Combined with a 47% lift in operating expenses, the after tax loss more than double to -$36.7m.
This added spend is (obviously) hoped to have laid the foundations for scalable growth into the future. It will be something to watch though; Nearmap's costs have always grown at a pace that offsets its strong revenue growth and has kept the business in a cash losing position.
At present, Nearmap has $33.8m in cash. Due to cash management initiatives implemented in April, the business expects to be cash flow breakeven in the current year. Safe to assume the market will very much welcome this if achieved.
North America, which accounts for 17% of total subscriptions but has about double the average subscription per user (greater proportion of larger enterprises), saw 27% growth in ACV. The pace of revenue growth is much greater than where ANZ was at the equivalent point after launch.
Growth so far in FY21 is on pace with last year. Combined witha resilient second half, it appears Nearmap's sales have held up really well during COVID.
At present, shares are on a P/S of about >12, which is certainly up there. That being said, should the business pivot to cash flow positive, maintain strong growth and show improved cost discipline, it could well be at a price that appears cheap in the medium to long term.
I think they continue to hold a very favourable competitive position, are showing good traction in their key growth market, and continue to broaden the product offering.
Nevertheless, I still see shares as a bit overvalued (see valuation).
You can read the results presentation here
A great update from nearmap today.
Glad i added it to my Strawman portfolio last month -- just wish i'd bought more! :)
You can read the ASX announcement here
Nearmap has provided another trading update. Key pionts:
You can see the full ASX announcement here
Nearmap has provided an update in light of the coronavirus pandemic.
No detail was provided in terms of the impact to sales experienced or expected, with the company only saying that it's offering helped facilitate remote working and that it was well placed to endure any impact due to its near $50m in cash.
You can read the full update here