Summer Series: Nearmap (ASX: NEA)

Bryce: [00:01:16] Welcome to another episode of Equity Mates, a podcast where we help you learn to invest in forty five minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I'm joined by my Equity Mates Ren. How's it going, bro? [00:01:31][15.0]

Alec: [00:01:31] I'm good. Bryce. How are you? [00:01:32][1.0]

Bryce: [00:01:32] Good, good. Always want to be chatting about stocks and here we are again doing Shellow Deep Dive for our summer series, chatting about stocks that have been recommended or suggested by our community, which was fun. We had about one hundred and eighty recommendations come in over a few days and unfortunately we could not get around to one hundred and eighty of them would be stuck in the studio for hours and hours. If that was the case. We have chosen 10 and today a stock that's been pretty hot and it's starting to cool down a bit is an AA is the ticker near map is the name. [00:02:05][32.2]

Alec: [00:02:05] But before we get to that, a few housekeeping. Yes. Where you got our Equity Mates shirts, hot property there may have all gone by now depending on when we realise this, but if you want to see if you can get lucky and get yourself one Equity Mates dot com slash shop and the podcast series everyone's been waiting for Get Started Investing feed Equity Mates is in your podcast feed now. Hopefully you've had a listen. You've had to subscribe. You've rated and reviewed it. But if you haven't Bryce and I unpack in 12 episodes everything you need to know to get started investing. So if you're listening to these episodes and concepts going over your head or you want something a bit more basic, or if you're, you know, deep into your investing journey, but you think you're due for a refresher head over there and listen to that. Absolutely no better way to start the financially successful year that is going to be twenty twenty then by getting the basics right and no better way to get the basics right than with Get Started Investing feed. [00:03:07][61.4]

Bryce: [00:03:07] Love that plug. Love it. No. So let's move across now to to near map. You know, many people may have heard of new map. It has been a hot stock of recent times on the ASX has cooled off a little bit, however, as it needs the end of the year. But so what is near that? Well, near Matt provide high resolution aerial photographs to companies such as construction, government, architecture firms, engineering all sorts of companies that require aerial photographs of before and after, perhaps on an annual subscription basis. That's their that's their revenue model founded in Perth about ten years ago and now very much on the path towards pushing into the North America market. So that's a bit of a briefing on on what they do. [00:03:59][51.0]

Alec: [00:03:59] Yeah. Now, not not satellite imaging. No, it's actually they actually fly planes and take photos. Yeah. Which I was surprised by. I don't know. I'm surprised that they can make those costs stack, given they are pretty good satellites in the various satellites that obviously can because they make a fair bit of money. At its peak earlier this year, they were valued at one point eight dollars billion. So the market obviously sees something in them. They've come off a bit since then, but they're still valued at over a billion dollars. They're at about one point to three when we record this with the share price of two point seventy two. So I guess maybe to frame this well, actually, let's frame this in two separate ways. Firstly, in terms of how they made a process better, and then secondly, in terms of the use cases for their product. So historically, if you wanted aerial imagery, it was an expensive and long process. You had to find a surveying company, then they had to go and actually take the photos, stitch them all together, say to them on a hard drive. It was a process that could take months and wasn't easily repeatable. But Neamat patented a camera system and a software system that goes with it that allows the company to capture aerial photos, stitch them together and publish them online within days. So they've really simplified that process. They've lowered the cost of doing it. And basically then they set up a subscription model for people to sign up with their software. Now they capture images of the same place about six times per year in an urban centre. So it's not like you're getting daily updates, but it's better than sort of getting one photo and having you having to then contract another plane to go and take another set of photos. Yeah. So that's probably the first bit of context in terms of how they created a better mousetrap, how they created a better way of doing something. The second thing that I think naturally comes up is who wants aerial imagery as opposed to satellite imagery. [00:06:06][127.5]

Bryce: [00:06:07] I know too well as I was reading through this, something that struck out to me that I hadn't have. Obviously, you've got your construction companies and mining sites and all that sort of stuff, but it's people who want before and after images primarily is a good use case. And an area of growth for them is the companies that are affected by severe weather events such as insurance companies. And we know that climate change and that sort of stuff is having an increasing effect on severe weather, including fires, hurricanes, cyclones in Australia, all sorts of stuff. And so the insurance industry specifically and also, you know, rescue operators and that sort of stuff utilise this technology to help with their recovery claims. You know, it's important to understand, I guess, for an insurance company, the level of destruction and that sort of stuff without having to send people to to the areas they can now utilise this sort of technology. So I don't know if you have anything else for a use case point of view, but I found that pretty interesting. [00:07:14][67.6]

Alec: [00:07:15] Yeah. Yeah, definitely. So that's a big one. I think you touched on property and mining, but it's worth just elaborating on that. It basically allows people to do desktop site visit. Yeah. Rather than getting on a plane and flying out or, you know, having to go and visit the site, they can get really high quality in some cases, three day imaging of sites that they're building online. So they're building or something like that. So that's a big one. A few other use cases. Just to give you an idea of who uses this, the solar industry is now using it to assess different customers roof space without having to go out to site. A really interesting one is hedge funds. So in the war to get the best information as soon as possible, hedge funds have, some have gone to the extent of tracking how many cars are in a factories car park or how many trucks per day labour factories, you know, car park or how a mine is being constructed, whether they think it's going to be delayed or ahead of schedule. So these this only updates six times a year, these some of these photos. So some of those use cases, they need more sophisticated technology. But there are things like that six [00:08:25][70.4]

Bryce: [00:08:25] times a year, those pretty frequent, like if you're trying to track how many cars come in and out of a [00:08:29][3.8]

Alec: [00:08:29] very true. Yeah, I don't mean track change over time as well. And then I guess the last use case, I'm sure there's different government uses and different military uses and stuff like that. Well, they probably have their own better satellites. But anyway, there may be some uses there and I think to give you the context. So when I read that new map update six times a year, the natural question that fell out of that was, well, how much does Google Earth update? Because never really something I'd wondered, but I figure satellites around the Earth pretty quickly. But apparently the average map data on Google Earth is between one and three years old. Wow. So if you compare that for people who want to do up to date desktop site visits, other construction sites that they're building or a mine that they're building, or they want to assess a customer's roof space for solar, or they want to, you know, look at a disaster area from an insurance company perspective, three year old map data isn't going to cut it. But if it's something that's updating every two months, like in the map, you get a much more up to date picture. [00:09:29][59.8]

Bryce: [00:09:30] I couldn't find anywhere because obviously they fly just coverage areas near map unless it would be a bespoke client, I guess. But to update these areas six times a year, they'd just be flying the same routes. I didn't really get an idea of how much coverage of Australia they actually they actually do cover. [00:09:48][18.6]

Alec: [00:09:49] So in one of their investor presentations, they had details on it. I think it was in Australia it was about 88 percent of the population area, population area. [00:09:58][9.3]

Bryce: [00:09:59] So primarily East [00:10:00][1.3]

Alec: [00:10:00] Coast, I would imagine so. Yeah. Yeah. So they cover four geographic areas Australia, New Zealand, Canada and the United States. And for all of them in their investor presentations, it's a similar percentage, sort of 88 per cent in one or 70 percent in another. Doesn't have one hundred percent in any. But it's sort of just covers the main areas where people are. [00:10:22][21.4]

Bryce: [00:10:22] And why don't use drones? I wonder if that's [00:10:24][2.4]

Alec: [00:10:24] a good question. [00:10:25][0.2]

Bryce: [00:10:25] Why are they pumping out flight so maybe they can cover more area in in a period of time, but get some drones up? [00:10:31][6.4]

Alec: [00:10:31] Yeah, that is a really good question. Yeah. [00:10:33][2.1]

Bryce: [00:10:34] Yeah, we'll have to ask them. I mean, [00:10:35][1.5]

Alec: [00:10:36] it just seems like it's a business that is ripe for disruption. If you think about. Yeah. Like drones, like the drones that the US military have and what they can say, actually some of that technology becomes commercialised in civilian applications at some point. But who knows, maybe the map will be the ones that are able to do that the fastest. [00:10:53][17.4]

Bryce: [00:10:57] But they might, because that means they have to employ pilots they went to they leased the planes, I'm sure they do. They probably wouldn't. [00:11:04][6.4]

Alec: [00:11:04] What are their fuel costs like? Yeah, and they're not the only company that does this. I know that two of our mates, one used to like near Map and the other used to like spook fish, which was another aerial imaging company. OK, Spook Fish got acquired by another company, Eagle View. So there's you know, there's companies out there that are doing a similar thing. So I imagine there's a lot of planes flying above us every day taking photos of us. [00:11:30][26.2]

Bryce: [00:11:30] Yeah. So Ren, I'm just reading here that the company flies over seventy two percent of the US population up to three times a year. So Covid. Yeah, plane mounted cameras. Still no [00:11:38][7.5]

Alec: [00:11:38] drones. Yeah. So when I said up to six I imagine that must be Australia. Yeah. Yeah. There you go. No drones. Maybe that's our business. So we delay releasing this episode and go buy some drones. [00:11:49][10.7]

Bryce: [00:11:49] Yeah, it's amazing. So they reckon imagery is four times clearer than free satellite imagery. Yeah. I'm still struggling to find why they thousands of flights a year with contracted pilots during the flyovers. The camera spins and captures all the imagery and uploads onto their map browser. Yeah, there you go. I think we should try and get in contact with them and ask why they don't use [00:12:10][20.1]

Alec: [00:12:10] drones or if anyone from near a map is listening, let us know or come on the show and we'll talk about it. [00:12:16][6.1]

Bryce: [00:12:16] Oh, here we go. He says with drones, you're only going to capture an area and it's very specific to that area, he said. Near Neamat will give a broader view. So I guess it's just to do with the camera that they're currently running. Or should we fly the drone drone higher in the [00:12:30][13.7]

Alec: [00:12:30] air, or is it the flight capacity of a drone like a drone can can't fly that far compared to a plane potentially. [00:12:37][7.0]

Bryce: [00:12:38] Yeah. Again, look, we [00:12:39][1.1]

Alec: [00:12:39] just get one of those US military drones that fly around the world. [00:12:43][4.0]

Bryce: [00:12:44] Well, anyway, so, yeah, they're expanding into into Canada. [00:12:47][2.8]

Alec: [00:12:47] Yes. So Canada, the US. Australia, New Zealand. Yeah. [00:12:50][2.7]

Bryce: [00:12:50] Yeah. [00:12:50][0.0]

Alec: [00:12:51] Big markets. Yeah, yeah. Yeah. So we've spoken about its use case. If we start to talk about its financials, it made seventy seven million dollars in F nineteen. Yeah. Up forty five percent from the year before. So you'd be pretty happy with that. However it's about it's earnings before interest and tax was an 11 million dollar loss which was thirty three percent worse than the year before. So its revenue is going up at a good clip, but its profit is going down. [00:13:22][31.4]

Bryce: [00:13:23] So that means its cost of doing business. So there's something in there that's significantly affecting it. [00:13:27][4.5]

Alec: [00:13:28] And I reckon what you touched on before about expanding into Canada could be [00:13:31][3.5]

Bryce: [00:13:31] one of the reasons for that. [00:13:32][1.0]

Alec: [00:13:33] When I was doing some research before this episode, this just really jumped out at me at the short term nature of the market. Yeah. So we mentioned there it was making a loss and its losses worsened, but also its revenue was increasing. So here's to headlines next to each other on Google, the first one from August twenty nineteen. Aerial bombardment, new map shares plunge as losses widen. And then two and a bit months later in November, twenty nineteen near map shares surged on US expansion. The first one was about the fact that they made a loss and their loss was worse and the shares did fall on the back of that. But then month and a bit later, Neamat gave guidance or confirmed earlier guidance that it's expected twenty twenty revenue was going to be between one hundred and sixteen million and one hundred and twenty million. And all of a sudden the fact that its earnings widened didn't matter from two months ago and the stock's surge. So, I mean, the media was very quick to turn around. Yeah, the market also hype driven. Yeah. But if we look at that, so if we take the lower end of that twenty twenty estimate. So if we say it's going to be one hundred and sixteen million dollars in revenue in twenty twenty and we're saying it was seventy seven million dollars in nineteen in twenty nineteen, then that's a 50 percent increase in revenue between twenty nineteen and twenty twenty. So. Wow. And that's at the lower end of its estimate. So look, revenue numbers like that get people excited and there's a good reason for it. It's great growth. What you would hope to see is that as that revenue number increases the. Earnings number similarly starts to head back towards positive. [00:15:18][104.6]

Bryce: [00:15:19] So obviously the model is driven by subscription. If you have a look at their group subscription growth, North America is where they're getting in percentage terms. They're getting the biggest growth year on year. Interesting Ren one of their major metrics and we kind of touched on it in a previous episode. It's more to do with their pipeline. Their annualised contract value is HCV is a metric that they talk about a lot here, annualised contract value of ninety million, which they say is up 36 percent on previous year. But I guess that's them just trying to show off their subscriptions that they've got locked in. You know, to the point we made before, you know, calming investors or at least demonstrating to them that they've got enough in the in the works or enough customers on board, that that's the value going forward for their contract. [00:16:05][46.6]

Alec: [00:16:06] If we're getting deep into the metrics. One number that did concern me a little bit was that churn. So from a dollar value perspective, the churn actually looks better. It went from, [00:16:16][9.9]

Bryce: [00:16:17] hang on, what's [00:16:17][0.5]

Alec: [00:16:17] churn? It's the rate at which customers are leaving the business. And so in F 18, seven point five percent of their contracted value left the business and that dropped to five point three percent in F 19. So that looks like an improvement somewhere else. They split our churn in terms of customer numbers rather than customer value. And when you look at that, it's actually that churn rate was in terms of customer numbers, was 11 percent worse than the year prior. And it looks like about nine point eight percent of all new and existing business leaves every year, [00:16:57][40.0]

Bryce: [00:16:58] nine point eight years of new business, [00:17:00][2.0]

Alec: [00:17:00] of new plus existing. So I just I took the existing number and added in their new customer number and then said, what's their churn rate as a percentage of that? And it was about nine point eight percent. So it seems like because the the dollar value isn't going anywhere, but the customer number is it looks like a lot of their lower value customers aren't seeing value in the platform or are leaving. [00:17:22][21.7]

Bryce: [00:17:22] Yeah, that's the that's the issue with the subscription based model. If you can't do one off. Sort of. You know, I mean, you feel like if you're locked in and you don't get value casual. [00:17:30][7.9]

Alec: [00:17:31] Yeah, yeah. And look, that that's that's not necessarily a problem, but the fact that more customers left the business this year than last year is potentially something you would want to watch pretty closely. [00:17:44][13.0]

Bryce: [00:17:45] So Ren, as I said, as a sales team contribution ratio, never seen it before. But essentially what that's showing is the effectiveness of the sales team. [00:17:53][8.2]

Alec: [00:17:53] Yes. Yes. [00:17:54][0.6]

Bryce: [00:17:54] Which is kind of a weird thing to me. To me, it's like it's all throughout here. I've never seen it before. I think it's primarily to do with businesses that play in this contract value space. Yeah. And they're trying to, I guess, show that their sales team are effective and contributing towards their contract value. [00:18:13][18.8]

Alec: [00:18:13] So in terms of how it's calculated, do I just explain that? I mean, [00:18:17][3.6]

Bryce: [00:18:17] it sounds like you're all over it. [00:18:18][1.0]

Alec: [00:18:20] So it's essentially the value generated in ASV, which is contract value, contract value. So the value generated by the sales team in terms of new contracts essentially divided both compared to the costs of obtaining that incremental value value. When we first spoke about it out of assumed you would want a sales team to pay for itself every year. Yeah. So you'd want that ratio to be above 100 percent, i.e. [00:18:45][24.9]

Bryce: [00:18:45] which it is at the moment. Yeah. [00:18:46][1.1]

Alec: [00:18:47] Which Nyumah, which is if you if you hire one salesperson at one hundred grand a year, you expect them to deliver at least one hundred and one thousand dollars in sales. But it turns out that were unrealistic in terms of outposts. Yes. According to a note in Near Maps Analyst Park, it says with a ratio of greater than thirty three percent, generally seen as effective in a SASO software as a service business. And that essentially means that the business recovers the cost of the customer acquisition cost from the revenues generated by that customer in a three year period. So our hundred thousand dollar a year sales person only needs to deliver thirty three thousand dollars a year in sales to be considered an [00:19:34][47.5]

Bryce: [00:19:34] effective average because they do a little bit better in the instance of near their sales team. Well, and above your average and delivery one hundred six percent. So get them on board if you need a sales tax. [00:19:46][12.0]

Alec: [00:19:46] I guess by that logic, like if you can sustain that ratio, you should put on infinity sales people because they're washing their face every year. Yeah. So you should like every incremental sales person you put on, I imagine would reduce the overall effectiveness because they're probably worse salespeople, because otherwise you would have hired them earlier or more to the point, your leads are less solid, like you start at the most solid leads who have the most need for the product. Yeah, but like as long as you can keep it above 100 percent and they pay back in year, take putting people on. [00:20:25][38.2]

Bryce: [00:20:25] Yeah, absolutely. Yeah. Right. Well should we have a crack at a valuation. I think it's actually got negative earnings per share so we're not going to be able to do. [00:20:31][6.2]

Alec: [00:20:32] Yes. And it's losses expanded year on year. So its return on equity is bad as well. [00:20:36][4.2]

Bryce: [00:20:36] Yeah, right. So our traditional forms of having a crack at valuation, Morningstar have come in yesterday, its last close to 65 to 70 to sorry, it's now trading at and its fair value came in at 262. So again, reasonable. [00:20:52][15.9]

Alec: [00:20:53] I just I feel like I mean, I haven't looked at any other Morningstar things other than what you've brought in. But throughout this day that we've recorded all these episodes, I feel like Morningstar anchor to the share price. [00:21:05][12.5]

Bryce: [00:21:06] Yeah, you could probably. Yeah, it's a daily it's a daily update. [00:21:09][3.3]

Alec: [00:21:09] So but that doesn't matter if it's daily, if it's a daily update, like if the value there has to be some companies where Morningstar disagree with the market they [00:21:18][8.9]

Bryce: [00:21:19] do disagree on, [00:21:19][0.8]

Alec: [00:21:20] but like always within a margin of error. Yeah. I want to say them like 40 percent off in terms of valuation. [00:21:27][7.5]

Bryce: [00:21:28] What we can do is actually go into Morningstar screener and find ones that fall outside that range. But that's unfortunately not part of this. [00:21:36][7.8]

Alec: [00:21:36] Not any that we. Yeah, as long as there are those that exist, there are. [00:21:40][3.8]

Bryce: [00:21:40] Okay. How about I take it as a to do action stocks for you. Good, good. So in terms of having a crack at a valuation, did you want to say anything that Ren. [00:21:50][9.7]

Alec: [00:21:50] No, I think look if Morningstar I think it's in the range or way to disagree with them. [00:21:54][3.9]

Bryce: [00:21:55] Beko, I think your growth company, [00:21:56][1.3]

Alec: [00:21:57] I think if you did want to look at comparing it, you obviously can't do a price to earnings. So maybe you look at something like price to sales and you compare it to some other industry players like Eagle View or Spook Fish or those books, which probably isn't publicly traded given it was acquired, that might be a way to compare apples to apples. [00:22:15][18.7]

Bryce: [00:22:16] Nice circle of competence. [00:22:17][1.2]

Alec: [00:22:18] Yeah, I think so. I've actually used I don't know if it's near me. It may be another service to look at some solar panels before. So, yeah. I mean it's it's imaging. It's you know, it's not rocket science, [00:22:30][11.7]

Bryce: [00:22:30] rocket science, it's [00:22:30][0.5]

Alec: [00:22:31] plane so [00:22:32][0.7]

Bryce: [00:22:34] nice and we'll we'll leave it there and pick it up again next episode. [00:22:34][0.0]