https://newswire.iguana2.com/af5f4d73c1a54a33/nea.asx/2A1401437/NEA_Nearmap_Chairman_webinar_script

$NEA Chairman held the investor webinar today on the TB takeover.

The board recommended the $2.10 offer on the following grounds:

• The $2.10 per share consideration represents a significant premium to recent historical trading prices.
• The all cash consideration of $2.10 gives you an opportunity to realise certain value for your shares now – particularly at a time of increasing economic and market uncertainty;
• You will no longer be subject to risks and uncertainties associated with the Nearmap business. These risks include:

o Adverse impacts from ongoing litigation from EagleView and Pictometry

o Adverse impacts from industry consolidation – as flagged earlier

o Adverse impacts from a competitor being acquired by a financial buyer – as flagged earlier

Repeatedly, in the address, the Chairman referred to the macro conditions meaning that it was the Board's view that SP was unlikely to return to the level of the Offer in the near to medium term. He was very focused on the hit to loss-making tech stocks and rising interest rates, i.e., macro factors.

Explicitly, the Board was taking a "short to medium term" view. Which I find strange.

He reiterated that $NEA will become cashflow positive in 2024, including the costs of Eagleview litigation. That means, that in 2024 $NEA will hit an inflection point. If it hits that inflection point, and is still growing ACV at 20-40% p.a. (as my valuation implies), it is worth significantly more than $2.10, even accounting for another to years of time value of money ... or $2.54 in FY24.

The rise of financial players, industry consolidation and AI etc. also seem flakey to me. Is there something they are not saying? Do they expect drones or low orbit satellites or some other disruption to render their tech edge obsolete?

In my mind, the rationale as laid out doesn't make sense.

Or is something else going on?

Hypothesis One: $NEA wants to make a major strategic combination but can't see how to do this in the current environment and sees a better chance with TB. Might it even be agreed with TB as the next step?

Hypothesis Two: Key insiders (Rob with 10.5m shares and more options and Ross Norgard with 24.5m shares) have lost patience and want to cash out at favourable terms? There risk-reward appetite is different from mine, as $NEA was on 0.5% of my netwealth prior to sale.

Hypothesis Three: They expect to come out badly from the Eagleview litigation.

Does anyone else here find the strategtic rationale weak? On that grounds, the entire tech sector should pack up and go home. Surely, once interest rate peak, the recession has materialised and inflation is under control, then implied discount rates for tech and other growth stocks head back to a "mid-cycle" norm, albeit not the low levels of the last few years. So, by mid-2024 we could see a return to favourable macro just when $NEA is hitting the inflection point. I'd buy that any day.

Bemused.

Further to the statement from the Chairman of $NEA, I have today offloaded by entire RL position for $2.08. Will exit on SM tomorrow. Why? What's the calculation?

Initially, I was minded to hold out for a better offer. It appears the Board has shaken that tree and no other offer has emerged. Time is running out. So this branch of my "expected value" calculation has just become less probable.

Accordingly, my mind turns to the sharehold vote later in the year. In the unlikely event that shareholders vote this down, then we'd see a massive correction back to pre-deal SP. Potentially, a short/medium term issue, but if it happens, I get the change to buy back at - say - $1.30. So, I can position myself to access that option.

However, the funamental issue is that now we have a management team and Board who were seeing their future better in private hands and have clearly demonstrated in accepting $2.10 that they are not as bullish about the firm as I am (or was).

I remain disappointed in the Board's decision and will read the "Independent Expert Report" with interest. However, the rational decision is to take the money. I've been on this particular journey since 2017 and was a $NEA Bull.

Disc: Not Held in RL; Held in SM

P.S.

Can someone clarify that a vote on a scheme of arrangement requires a majority of voting shareholders to vote in favour of the scheme, as well as 75% of votes (shares)? Is that the path they have to follow, or is there an alternative?

https://newswire.iguana2.com/af5f4d73c1a54a33/nea.asx/2A1398377/NEA_Letter_from_the_Chairman_of_Nearmap

Update on the acquisition. In this letter, it is stated that the "Board also considered a number of other non-binding expressions of interests for Nearmap, none of which were considered by the Nearmap Board to be in the best interests of Shareholders." 

On this basis, it sounds less likely to me that a superior offer will emerge, as interested parties to date will have been encourage to better the Thomas Bravo offer.

I look forward to reading the Independent Expert Report confirming that the deal is in the best interests of shareholders. Inmaking that assessment, I assume they have to arrive at a valuation of the "do nothing" alternative?

Disc. Held

Thanks @nerdag for reminding me about the role of short sellers on volume and price action. That explains it. I wonder if now we’ll see a return to $2.10 as other holders assess opportunity cost?

At this stage, I still intend to vote against sale. Unless I need the capital for another idea. But as I have reasonable cash on SM and IRL, that gets deployed first.

$NEA interesting. At $2.15 heading into the close on >15m shares traded. 3rd consecutive day of high volumes. Is this a bunch of buyers positioning/ expecting another bidder to emerge? What gives?

Disc. Held IRL and SM (and sitting tight)

Here are the links:

Release

https://newswire.iguana2.com/af5f4d73c1a54a33/nea.asx/2A1391156/NEA_FY22_Results_Strong_Growth_Strong_Cash_Position

Presentation

https://newswire.iguana2.com/af5f4d73c1a54a33/nea.asx/2A1391165/NEA_Investor_Presentation_FY22_Results

Analyst Pack

https://newswire.iguana2.com/af5f4d73c1a54a33/nea.asx/2A1391172/NEA_FY22_Analyst_Pack

$NEA reported its full year results today. If you missed the presentation and are interested in the detail of what was said, especially the Q&A, the full transcript is here:

https://newswire.iguana2.com/af5f4d73c1a54a33/nea.asx/2A1391345/NEA_FY22_Results_Transcript

I added the links to presentation, release, and analysts pack at the bottom of this straw.

Rather than do a poor job of rehashing content from these materials attached, here I will share some of my key takeaways and impressions. (I will return and flesh out some items and valuation another time.)

Overall Investment Thesis is Intact Driven By Strong NA Progress

Overall contract and revenue growth were strong, and towards the top end of guidance. This was underpinned by very strong NA market and less strong ANZ. Given the much greater scale of NA, this is a good place to be.

Incremental ACV grew a second year in a row, by a record $33.3m – underscoring that they have cracked the NA market, which was a real question-mark 2-3 years ago.

There has been heavy cash investment in: NA coverage, in Hypercamera 3 development/rollout and in Sales and Marketing. Therefore, my usual CF trend analysis below doesn’t look so great. Based on the CF numbers, there isn’t any trend to cash generation.

Should we be worried?

Normally, I would be. But both Rob Newman and CFO Penny Diamantakiou stated repeatedly that $NEA will be CF positive in FY2024. Cash outflow would peak in 1H23, trend toward breakeven in 2H23 and then FY24 would be Free Cash Flow positive for the full year. (This was clarified in the Q&A by one of the analysts, and it was reiterated so as to be completely unambiguous. You cannot get a more explicit setting of expectations, in my view.) They have ample cash and debt capacity to achieve this with a good margin of safety.

Secondly, there was no change to the short-to-medium term target of ACV growth of 20-40%, which is clearly needed to underpin turning $NEA cash generative in that timeframe. Rob remains adamant that it is still early days in penetrating NA.

These top-level metrics are underpinned by:

·      Annual Churn is steady, with retention at 93%

·      Subscriptions are growing steadily at +8% (7% pcp)

·      ARPS is accelerating at +21% (+11% pcp)

·      The distribution of revenue per subscription is trending to larger values, more multi-year deals, more premium content. Overall, customers are using more with time and getting more value.

Hypercamera 3 technology is being rolled out. (1 in operation in Aus. Plan for one more in Aus and 4 in NA through FY23). Importantly, the “efficiency” of HC3 is double that of HC2 (I think that should be productivity, not efficiency). This will increase optionality. Either cover the same area at half the cost, or fly lower and provide higher-value content. This optionality lever is clearly one of the key sources of competitive advantage, and it was referred to in general terms to support the path to cash generation narrative.

There are of course some aspects of the results that are no so good, and I will deal with these later. Overall, they don’t affect my top line summary: $NEA is succeeding because is has cracked the NA market.

Often, I find, there is more to a presentation than the numbers and explanations. For me today there were two overarching points:

1.      There was nothing remarkable or surprising in this presentation. I’ve been listening to Rob Newman now for 5 years and, with respect to America, the story evolves consistently and gets more granular each time. I really get the sense that $NEA is coming to grips with how to compete and win in NA.

2.      Both Rob and Penny came across as very confident and fact-based both in presentation and in the Q&A. (I have a strong BS detector, and it didn’t go off once!)

Making a Virtue of Churn

I can’t see it in the numbers, but there was a reported significant churn event in NA. As it turned out, this was a (what was clarified under Q&A as insurance) partner who $NEA chose not to renew because $NEA is increasingly providing more of the value-added services through its premium content. Nice story… even if a bit of spin. Seriously, they were making the point that the value-added data-analytics and AI services being provided with the data are becoming more important, so they want to provide this directly to end customers and will be prepared to cut out partners. If this is true, we should continue to see strong growth in ARPS over time. That’s part of the investment thesis, so good to see it coming through anecdotally.

Capital Discipline Being Demonstrated

Part of my confidence in management is that they are starting to demonstrate capital discipline:

·      FY22 spending of funds from capital raise was closer to $20m than initially guided $30m

·      CF breakeven in FY2024 looks like a stake in the ground

·      Reference of goal to be CF breakeven with a strong remaining cash balance

·      Not now looking at Europe until CF breakeven delivered (because NA opportunity so big)

·      Prepared to use “optionality” to keep to guidance (capex; cash burn; coverage etc.)

The Not So Good

There were some areas of weakness in the results.

Gross Margin(pre-capitalisation):  This was down from 75% to 72%. However, Rob made it clear that this is due to the increased contribution of NA, compared to more mature and higher margin ANZ. He said “cost of capture in NA is 4 x ANZ”. So, we should see some further trending down of this metric. NA is 10x+ ANZ in terms of potential. So I’d rather win in this market even if margins are lower. Its total value that counts.

Sale and Marketing: The key sales productivity metric- Group Sales Team Contribution Ratio (STCR) was down again this year to 85% from 89% in FY21. Explanation: they pushed hard in NA, added a lot of heads with a stronger focus on direct sales and marketing, relative to indirect (via partners). With more heads still being added, this might not have bottomed out yet. But by arguing that the result was as a result of rapid team growth, there is no sense that it’s getting harder to make the sales. Which would be a concern, and something to keep track of. They also didn’t blame external factors like COVID or concern about the macro-environment. On the contrary, Rob said most of their customers are 1) acyclical and 2) looking to implemented $NEA to drive out costs. (Long live the forthcoming recession!)

ANZ is Maturing or Is It? We’ve seen several periods of softening growth in ANZ. For the last three years, ACV addition has averaged about $5.5m which is starting to look anaemic alongside NA. (It was not always thus.) We have had prior reports where Rob has admitted that the focus on NA has meant that management has taken the eye off the ANZ ball. Now a new, focussed GM is in place, they have learnings from NA and are about to refresh a new focused verticals strategy. I given them the benefit of doubt - they have shown they can learn in NA. In any event, ANZ is more mature. If they can kick things into gear there, then it is cause for future optimism. But it is not a thesis breaker given the quality of the ANZ business and materiality of NA.

The Lawsuit

Not much news. Spending serious money and treating expenditure here as below the line – unwilling to guide, but order of magnitude is $10m p.a. Taking on Eagleview by challenging validity of their patents. Confident theur will prevail.

The Takeover

No comment. Will act in shareholders interests. (OK, but what do we think $NEA is worth.) Blah Blah.

Disc: Held IRL and SM

@Strawman it also struck me as strange, particularly given that we are in the indicative non-binding phase. (I have never agreed such an arrangement in my time doing deals at this stage, but I wasn't in tech.)

I wonder if this was the price that the suitor extracted from $NEA for them to announce ahead of the results? Lot's of share options riding on SP progression, and (cynically) it is in $NEA's interest for the market to view the latest results against the backdrop of potential acquisitions rather than a more general market that is still uncertain about valuation of growth stocks. Suitor would have preferred finishing their work and coming to a definitive price, but then Board could have been accused of not fulfilling their continuous disclosure obligations had they not annouced. Or perhaps, if Board has no choice, then suitor might have threatened to withdraw unless compensated. I'm not clear as I am not expert on continuous disclosure and how it works in Oz.

In light of this morning's reported takeover offer of $2.10/share cash for $NEA, I note the following:

Strawman Consensus sitting at $2.736

Broker Vals average $2.16 (n=8, range $1.40 - $4.49; source: Marketscreener.com)

My own valuation $2.48

We should expect a revised offer after due diligence and potentially other offers may crystallised. This is time for M&A of quality beaten down tech stocks (although $NEA "quality" remains unproven).

I hope the Board holds out for the Strawman Consensus AT MINIMUM!

Disc: Held IRL and SM

NEARMAP Challenges Validity of Eagleview/Pictometry Patents

I'm not sure what to make of this. Does it mean that NEA believes its success in defending the Eagleview action will rely on the Eagleview patents being deemed invalid, or is it simply a case of attack being a good form of defence?

https://cdn-api.markitdigital.com/apiman-gateway/CommSec/commsec-node-api/1.0/event/document/1410-02505720-2HQFSGG0V0S0F0N02N3VFRFFON/pdf?access_token=0007lGeiB3R2K5u6tmyHKGXpYqZr