Company Overview:Nearmap Ltd is an online PhotoMap content provider. The Company provides geospatial map technology for business, enterprises and government customers. Its segments include Australia, which is responsible for all sales and marketing efforts in Australia; United States, which is responsible for all sales and marketing efforts in the United States, and Corporate, which holds the intellectual property (IP) and product know-how that allows the Company to deliver its product offering, being online aerial photomapping. It offers solutions for various industries, such as architecture and engineering, construction, government, insurance, rail, property, roofing and solar. It provides site information, delivered to users' desktop through high-resolution PhotoMaps technology. Nearmap Insurance provides a desktop-based risk assessment solution. Nearmap Rail delivers visual analytics to mining, port and rail infrastructure. Its property solutions include Nearmap ART and Nearmap Property Tool.


NEA Details
 
Nearmap Ltd (ASX: NEA) witnessed a healthy FY17 financial performance close to the estimates given the continued organic growth in Australian division with significant rise in revenues while momentum geared up in the US. Further, FY17 entailed an investment phase with scaling of US operations and roll-out of HyperCamera2 product (obliques and 3D modelling). Positive response on new product in the US, product roll-out tracking well and efforts to double the ACV portfolio in FY18 seem to bring NEA to move in right direction. These along with the continued improvement in Portfolio Lifetime Value are expected to provide a step change in growth trend going forward.

Decent FY17 performance: Nearmap delivered an Annualised Contract Value (ACV) growth of 29% year on year (yoy) to $47.0 million in FY17 driven by their subscriptions which rose to 7,832 as compared to 7,190 in prior corresponding period. Average Revenue per Subscription enhanced 18% driven by the rising customer’s usage of their product and the group’s ability to close larger deals. The group derived over $5.5M of their portfolio growth via upsell of the current customers in Australia and the US indicating the benefits of their ‘land and expand’ sales strategy. It is noteworthy that major customer sectors for Nearmap range from Architecture, Construction to Engineering sector, which account for just over one quarter of the portfolio.

During FY17, the group churn as measured by ACV value dropped from 13% to 10% in FY17. As a result, the group’s portfolio lifetime value surged to $365.5 million as of FY17 as compared to $223.9 million in prior corresponding period. The group’s free cash flows reached $11.2 million, while an investment of product and technology of $10.1 million was made. The group’s net proceeds from the capital raising and related Shareholder Purchase Plan were $20.0 million.
 

Overall performance in FY17 (Source: Company Reports)
 
Strong penetration of HyperCamera2:For the group’s next generation HyperCamera2 product, NEA is targeting 50% of US population coverage. They have already captured and published content from 12 major US cities while targeting over five major metropolitan cities in Australia in the coming few months. The group is making an accelerated roll-out of HyperCamera2 focused on capture during the first half of FY18. They restructured the Australian sales and marketing operation and appointed a new Vice President of Sales and Marketing, to enhance their focus on sales and marketing efforts.
 
US operations performance tracking ahead of Australian segment: The group’s US ACV portfolio accounted for over 15% of the total group portfolio as of FY17. The segment started to generate positive gross margins, while the group expects the US portfolio to deliver a rising contribution to the portfolio lifetime value. The US business represented 11% of FY17 group revenues and contributed 33% of FY17 group revenue growth. The US ACV of $7.0 million as of FY17 (converted to AUD) is ahead of the Year 5 revenue run rate as compared to the Australian segment. The group’s growth till date in the 2D market – oblique and 3D product capabilities indicate solid potential market expansion opportunities. US ACV portfolio more than tripled to $5.3 million as of FY17 from $1.5 million in prior corresponding period. The group’s new Business of $3.4 million drove this performance indicating their solid sales and marketing effort. The segment’s Upsell of $0.7 million shows the first substantial year of upsell with this representing 50% of the value of the opening portfolio. On the other hand, the Customer churn (representing the dollar value of subscriptions not renewed in a particular year against the opening ACV value) reached 20.2% as of FY17 as compared to 18.5% of FY16. Acquisition of a partner signed by Nearmap in FY16 by a competitor during FY17 and the non-renewal of their subscription impacted this performance. However, the group’s US portfolio weightage towards larger enterprise subscriptions is rising wherein the enterprise customers (subscriptions greater than $15,000 p.a.) represented 71% of the portfolio. Subscriptions to small and medium enterprises (representing subscriptions below $15,000 p.a.) contributed 29% of the portfolio at 30 June 2017. Overall subscriptions for US surged 67% to 605 during the year as compared to 363 in FY16 while the average revenue per subscription more than doubled to $8,771 against $4,113 in pcp. US segment derived 28% of their business from Government sector while Insurance & Property segment contributed over 24%. Architecture, Construction and Engineering, and Solar contributed 17% and 14%, respectively. The segment reported a free cash flow of $14.5 million, with cash receipts of $6.2 million.
 

Rising US business contribution to the overall portfolio (Source: Company Reports)
 
Australian segment performance: The group’s Australian revenues surged 22% yoy to $36.3 million driven by ongoing growth in the ACV portfolio which rose to $40 million from $34.4 million in pcp. The segment’s EBIT margin enhanced to 58% driven by the ongoing efficiency of the SaaS business model. NEA maintained the gross margins >90% despite incurring higher expenditure in expanding the frequency and coverage of the capture program. Meanwhile, the group’s ongoing focus on customer retention led to decrease in churn to 10% in FY17 from 13% in FY16. However, the new subscriptions were below expectations. To mitigate the challenges, the group got new sales and marketing leadership team during second half of 2017 to build a sustainable platform for future growth. The Australian segment generated a free cash flow of $21.8 million while the group built a diversified Australian portfolio with Architecture, Construction and Engineering representing 27% of the total ACV portfolio.
 

Consistent performance in Australia (Source: Company Reports)
 
Outlook: The group intends to continue to grow from their current business and is targeting new clients.  They have already built a huge subscription base in Australia offering high quality recurring revenues. The group expects the sales in the US business for FY18 to cover the capture costs in that geography during the year. ACV portfolio is also expected to double in FY18 while the region’s gross margins would be positive. The group expects their first half of 2018 investment in sales and marketing capability and scale, to generate returns from sales team contribution ratio in the second half of 2018. As per the Australian segment forecasts, the group expects a double-digit percentage growth in ACV for FY18. They expect their gross margins to be consistent. NEA also made an incremental investment in targeted sales and marketing capability, to strengthen the sales team contribution ratio. The group expects their capture program investment to be consistent with the second half of 2017. Investment in product and technology is being done to focus on oblique imagery delivery and 3D content enhancement.
 

2018 Initiatives (Source: Company Reports)
 
Stock performance: Nearmap has built leading imaging technologies and is currently leveraging the capabilities to deliver an expanded product suite. The US business has an outstanding market potential, and accordingly, the group has built a solid operational base as well as enhanced the subscription portfolio. The group also strengthened the Australian business sales and marketing. Moreover, their Australian business will organically fund the US growth opportunity. The group also boosted their capital position to enhance their growth opportunities in US as well as Australian markets. On the product side, the group’s commercialization in 3D is a first mover advantage. Further, the derivative 3D products created a new market in both US as well as Australia, via subscription access rather than expensive bespoke offerings, and the group is well positioned to capture this opportunity. The shares of NEA rallied over 32.9% in the last six months (as of November 06, 2017) and were seen to be moving up by about 4% on November 07, 2017 before the close of trading; and we believe this momentum in the stock will continue in the coming months. While any slippage in the US can be considered a risk, fast-growing revenue profile, profitable Australian business, and next leg of growth setting in the US make a case for share price appreciation. We give a “Buy” recommendation on the stock at the current price of $0.675, ahead of its Annual General Meeting scheduled for November 16, 2017.
 
NEA Daily Chart (Source: Thomson Reuters)

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