A look at the built environment with Nearmap

Rob Newman is the CEO of Nearmap. We spoke to Rob in June last year when the share price was 60 cents. Beginning in September this year it was triple that at about $1.80 where upon Nearmap and Rob raised $70 million at $1.60 a share from institutions, replenishing their bank account and the shares have since fallen to about $1.30. Obviously, that’s all just part of the global sell off in the September and October. 

Nearmap have an interesting subscription business; they take pictures of the built environment and they sell subscriptions to it to various users: construction companies, governments and solar panel installers who can plan their businesses using the pictures rather than a visit. 

The money is being spent on expansion in the United States and they’re now about to announce a third country that they’ve gone to. They’ve started off in Australia, they’ve gone to the United States, they’ve covered 70% of what they need to cover, they’ve covered 70% of the American population which they reckon is about it so they’ve covered the United States and they’re about to move to a third country.

The long term plan is to become global, to have constantly replenished pictures of the world’s built up areas which is a big ambition and a very interesting long term proposal for an Australian company that’s just an Australian start up.

The point I suppose now is, and this is a development since we last spoke to Rob, is that they’ve proved their business model, they understand it, they’re comfortable with it and it works. Now it’s juts a matter of expanding globally and not only geographically but also in the products they’re offering. For example they’re now offering 3D rather than 2D pictures, they’ve got 3D pictures of urban environments which is most interesting. 

Here is Rob Newman, the CEO of Nearmap. 

Rob, perhaps we could start with the cash position, you’ve just raised $70 million at $1.60 a share and your balance sheet showed you had $17 million in cash at the end of June.  What’s your cash burn rate at the moment and when do you expect to break even?

Yeah, actually we announced it in our FY18 results that we will be cash flow break even for FY19.  That was obviously an announcement made prior to the capital raise.  Our intention hasn’t changed, in fact.  For the business as it stands we will be cash flow break even for the operating part of the business and the additional cash that we’ve raised we have earmarked for some other kind of strategic initiatives to grow the business more rapidly.  No change in the plans there.

Are you talking about the entirety of financial year 19 you expect to be cash break even, is this on a run rate basis?

What it means is if you take the capital raise out, so the $70 million that we raised, we started the year with $17.5 million and will finish the year with $17.5 million.  It’s reasonable to expect that in the first half of the year we’d still consume a little cash and then start to generate cash in the second half of the fiscal year.

Is it fair to generalise that as you’re making money in Australia and spending it in the United States?

Yeah, we have been generating cash in the Australian part of the business for several years now, we’ve been investing in the U.S. business.  If you look at the U.S. business on its own it’s also trending towards being a cash flow break-even business.  In our last fiscal year the cash that we received within the U.S. business exceeded the cost of our capture programme from a cash point of view in the U.S. so almost $13 million US generated versus the capture programme being $9 million US.  We’re already kind of trending in the right direction there, obviously we still need to cover the cost of sales and marketing but given the metrics in our business that we’re trending towards covering that cost as well.

What exactly are you spending that $70 million on that you raised?

There’s three initiatives.  One of them is to fund the continued growth of our sales and marketing efforts in the U.S. and that could be up to $10 million of the 70.  The other two are really around geographic expansion, so going into other geographies, going beyond Australia, U.S. and New Zealand, so expanding into a new market.  We haven’t announced which one that will be yet but we expect to hear something from them soon.  The third initiative was around acquisitions of technologies that are complimentary to our own and that would include things that either improve the productivity of our capture and processing adding tools and services on top of the data that we provide to our customers and generating more content.  Those are the areas that we would look to use that capital that we raised.

If you’re moving to a third location or third geography should we assume that therefore that you’re just about or you’re coming close to capturing all of the U.S.?

Actually, if you look at our capture programme wherever it is we capture the areas that are built up – I presume by capture do you mean market capture or do you mean actually coverage and where we collect our content?  Sorry, I should have said that at the start.

I’m talking about content capture, yeah.

Content capture.  Alan, we focus on the areas that have high economic value, primarily the built-up areas.  We cover about 70% of the U.S. population at the moment.  Getting much beyond 70% you get into kind of diminishing returns, there’s lots of small towns in the U.S.  For us I think that metric of 70% coverage in the U.S. is about right.  Would we increase it a little bit?  Possibly, but no I think really going into new geographies beyond the U.S., New Zealand and Australia it’s more about we understand our model now, we understand how it scales and it makes sense for us to start to expand our coverage footprint and grow into a global company.

That’s as I understand it, and that’s what we’ve discussed previously, that the long term aim would be to have global coverage of built up areas, is that still the case?

Absolutely.  I think one of the things that’s unique about Nearmap is I guess there’s a couple of things.  One of them is our technology is much more productive in capturing the content than anything else that’s out there so that allows us at least at a capture programme level to scale our business more rapidly than any other player in the market.  Related to that, obviously, our SAS business model, so delivering our content as a service, that also is unique and is a much more scaleable approach than what the other players in the industry do which is kind of this Bespoke capture programme.  They kind of capture the content on behalf of a single customer and then deliver it to them months later. 

We have a much more scaleable technology and a much more scaleable business model, and so that enables us to grow into a global company much more than any of the other players in the market.  Yes, that’s still very much our aspiration.

Perhaps you can help us understand the long term sort of cash situation in terms of going beyond the United States.  I suppose it comes down to whether you think cash flow from the United States will be able to fund the capture of geographies beyond that or will you need to continue to raise money from the share market?

I think we don’t need to raise money from the share market to grow into other geographies beyond what we’ve already raised.  If you look at the U.S. capture programme that’s a US $9 million per year capture programme.  If you look at other countries the U.S. certainly has the largest scale both in terms of number of people and number of cities and so on so we’re not talking very large numbers to start capturing large parts of continental Europe or extending into Canada or certain parts of Asia.  The capital that we have gets us to where we need to be.  Then also if you look at the economics of our business the Australian business, which is more well established, that has greater than 50% EBITDA margins so it is generating a lot of cash. 

If you translate those same margins into the U.S. market, because it’s a much larger market, you can see we can be generating the cash we require to scale globally just based on the U.S. and Australian businesses alone plus the cash that we have in the bank today.

That’s what I was wondering because you’re being a software for service or subscription business once you hit break even the cash generation is pretty powerful, isn’t it?

Very powerful.  I think that’s the piece that’s unique about our business, we were talking about that just a couple of minutes ago, having that SAS model, the kind of unit economics that we have worked very much in our favour because we’d capture the content once and sell it to many different use cases and industries.  In Australia at a 94% gross margin and greater than 50% EBITDA margins out of the Australian business we really do have very strong cash generation out of the business once it gets to scale.  Because we’re line of sight of having cash generation out of the U.S. business if we just continue to grow at the same rate we’re growing it’s 12 to 18 months from now, that means that we’ll have two very strong cash generation engines out of our business.

Is there any scale benefits to be achieved?  Are there global clients here that you can get by having a more global business?

Yes, in fact that’s one of the approaches that we’re using to drive our expansion beyond the U.S. so a number of our customers in the U.S. are multi-national so they have interest in content beyond just the U.S. and Australia.  In fact, we’re already selling to companies who use both our Australian and U.S. content.  Having customers who are already aware of Nearmap, using Nearmap but are interested in a European footprint and a Canadian footprint and an Asian footprint, that just helps us scale.  In fact, to some extent it gives us confidence to expand into those other markets because we know there’s existing demand for our content.

I’m interested in your customer portfolio because when I kind of looked at it in the past the business seemed to be a good way to get some exposure to solar, solar PV on rooves.  The boom in that, Nearmap is a way to get some exposure to that.  Actually, your customer portfolio is pretty widely spread.  According to the June 30 pie chart solar is 10% actually, insurance and property is 30%.  You’ve got other categories called commercial and other, I don’t know what that means, and government, who knows what that means as well.  Give us a sense of the spread of your customers.

Yeah.  You’ve covered off several of the major parts of our customer base there.  Construction and engineering, which is a pretty broad category, it’s everybody from replacing rooves to people planning major projects like Westconnex here in New South Wales.  A lot of the construction customers use our content to plan their jobs, they can do a lot of the work just with the content that they get from us because we so frequently update it.  Yes, government uses us for monitoring projects, similar I guess to construction engineering but also planning and tracking the local users, of course.  If it’s a council they’re looking at utilisation of parks and the greenery, the change of greenery in their area, all of those things are applications.

Solar is obviously a good example.  I see that will be a good growth area for us in the U.S.  The solar industry in the U.S. is kind of still at the early stages of its development, not quite as well developed as Germany and Australia so there’s a good growth opportunity there.  Insurance and property is another obvious other use case and has really come on strong for us in the U.S.  That other category, commercial and other, it surprises us every day the different uses for our content that don’t fit into those kind of big categories whether it’s lawyers looking at resolution of property boundaries. 

One recent example is relocating koalas that had been displaced by urban development.  Another interesting example is a food truck business that uses us to determine where to send food trucks because of where are the construction sites.  Just a variety of use cases where we replace a physical site visit with virtual site visits, it just continues to blow my mind, in fact.

You’re not saying you pick up koalas are you?

We don’t, but there’s a koala rescue organisation that uses Nearmap content and what they need to do, as required by Queensland government legislation, is those koalas need to be relocated within a 5 kilometre radius of where they were displaced.  As urban development happens this koala rescue organisation uses our imagery to determine the best place to relocate the koalas.  We’re not picking up the koalas but we certainly are picking up information about the environment that’s useful.  It’s also used by Queensland Search and Rescue in rescue operations to determine where people might have gone if they’ve been lost or have left a facility, for example, in the case of a dementia patient.  The use cases, again, are quite broad in terms of how our content is used.

You’re getting your churn down.  I think it was 8.8% in the latest 12 months.  Where do you think churn will settle?

We’re comfortable with a churn rate that’s 10% or better so the fact that we’ve got our global churn down to 8.8% and it was 7.4% in Australia.  Given that there’s increasing competition in both markets the fact that our churn is decreasing tells you a lot about the value of our content and the leadership position that we have in the market.  I think I’m comfortable with a churn rate 10% or better, that means the average customer lifetime with us is over 10 years.  We have got a lot of programmes in place to make our content valuable to our customers and treating our customers well.  As churn continues to trend down that’s a very positive indication to the value of our content and our competitive position.

You’re quoting upsell of 3.2 million in the year to June, what is upsell, what are you talking about?

Quite simply it’s primarily driven by our customers using more of our content.  Typically what happens in a medium or a large sized enterprise is a small department might use our content.  It might be a project planning department looks at where are we going to look at a construction site, for example.  Then what they find is other groups within the same organisation use it as well so the number of users increases and as there’s more users using that content the usage goes up and then that’s really what drives upsell.  Our pricing model is quite simple, it’s driven by the more you consume the higher the package you go onto.  Increased usage of our content relates to upsell.

There’s a second component, we’re now adding higher value content, so a side-on view which we call oblique and also our 3D content, so a full 3D model of what’s on the ground.  That’s higher value content, that also is starting to contribute to upsell as well.

How do you achieve 3D pictures?

That’s some pretty interesting technology that we have.  As you know, Alan, our company is very much a technology company and we have developed our own camera systems and processing software that really puts us in a leadership position globally.  Those camera systems are placed in aeroplanes, we fly over cities and we’re taking so many photos of the truth on the ground from so many different angles that it allows our software to actually reconstruct a 3D model of what’s on the ground.  Some of those videos are actually very impressive when you do fly throughs of New York City, or Sydney, or whichever city we’ve been capturing in 3D, so a really powerful technology for our customers.

How much more do you charge for 3D?

The 3D at the moment we price on a slightly different model, so we price it on an area of interest and so depending upon whether you’re looking at 1 square kilometre or 100 square kilometres or 1,000 square kilometres it costs more.  It is a significant premium over the normal 2D content of course but again it delivers a lot more value for our customers.

I imagine it also delivers more customers, more people can get use of either 3D or oblique view, side on views. 

It does, it opens up the market for us into a number of use cases.  What we find is that not only our existing customers, so think of construction and engineering, if they’re planning a job having a 3D model of what’s on the ground and seeing what a new building or a new Freeway would look like within the existing built environment.  That just means there’s more use cases within our existing customers but also we have found that it’s opened up use cases that we hadn’t dealt with before, specifically telco with wireless planning.  Having buildings in the way of a wireless signal you need to know that, so that data comes from 3D that you couldn’t have got from 2D.  It gets us deeper into the telco space. 

It helps with solar planning as well, knowing the slope of a roof and where shadows might be.  3D certainly opens up a much broader set of use cases for us.  That’s another part of our market expansion, not just geographic expansion but expanding the use cases for our content.

Are you able to create a 3D model of a proposed building if the client sends you the dimensions of the building and a picture of it or something, can you just inset it into your 3D pictures?

It actually happens the other way around.  We make our 3D content available to our customers and then they will have design tools, a CAD tool, computer aided design tool, for example, where they will have already built the model, as you say, of the building that they want and they drop it into our virtual environment.  We’ve demonstrated that but it’s really our customers do that in our virtual environment rather than the other way around.

Is your intention long term to have 3D pictures of the entire world?

I would love to get that.  I think the entire world is probably a stretch but certainly in terms of all the key built up areas around the world.

That’s what I mean.  I don’t mean the Sahara Desert, I’m talking about built up areas.

Yeah, there’s probably a little less value having the Sahara Desert but yes, absolutely, we currently have about 75 cities built up around the world in 3D and as we capture more content and expand we will capture all of our cities in 3D and make those available for our customers to use for all those different applications.  We have a saying which is reality is a service, so we basically capture the real world as it is in 3D and deliver that as a service to our customers.

You’re not going to tell us which country you’re going to next?

Stay tuned is probably the short answer to that one.  Post a capital raise we have begun work on which are the next countries we believe are the most viable for our technology and given the capital raise was done a month and a half ago we are well into that planning process and stay tuned, we’ll update on that soon.

Can you paint us a picture of your competition?  Does anybody have similar technology to you and to what extent is your defence based simply on first mover?

Good questions, Alan.  First of all in terms of technology we believe we have a 5 to 10 times productivity advantage over all of the off the shelf systems that are out there today.  Let me just translate that for a second.  If we spend $9 million a year to capture the U.S. in our content that means anybody else using off the shelf systems would spend somewhere between $50 and $100 million and that just is completely uneconomic.  Our technology is core to enabling our SAS business model and we will continue to invest in driving higher productivity out of our capture system so we can capture more and more content for that same cash spend.

There is a start-up out of Perth that has been working for the last five years on developing a technology that’s similar to ours.  They eventually will get there but haven’t quite got there, they’re certainly not at the scale that we are yet.  That company is in the process of being acquired by a U.S. company.  I expect somewhere over the next year or two they’ll eventually get a technology that’s similar to our own but obviously in that time period we’ll continue to drive our leadership and stay ahead of the curve.

Is there any possibility that some time in the future you’ll be able to capture internal spaces?

It’s not something that we’re focussed on at the moment.  I think if you look at where we see capture technologies in general we’re very much focussed on the exterior.  There are good technologies for capturing the interior of buildings but capturing the exteriors there’s really three primary ways of doing it, you can either do it from satellite which we don’t do.  You can do it from aeroplanes, which is what we do, or do it from ground level which will come from either vehicles with sensors on them, cars with sensors on them, or drone.  I think the next most valuable data source to add to our own is that terrestrial or car based or drone-based data set. 

There’s some good technologies out there that we think would be complimentary to our own so again I’m not being specific here but it’s having the capital that we’ve just recently raised does give us the ability to kind of broaden our data set for our customers and I think having ground level view combined with aerial view is probably the most powerful data set that can be had.

The advantage of a drone would be that it’s simply closer to the ground?

Yeah, the advantage of a drone is it’s closer to the ground, so you get more detail.  The disadvantage of a drone, of course, is it doesn’t have the scale of data that we have.  It tends to be a single building or a single construction site at a time.  What’s interesting, of course, is autonomous vehicles and as the sensors on autonomous vehicles are collecting more data as they’re driving down the street for example that data set, I think, is a good complimentary at scale data set that would make sense to add to our own.  Nothing specific on the short-term horizon there but I think it is an area that over the next few years combining the two data sets, aerial with terrestrial, is the most powerful combination.

Just to conclude, Rob, it sounds like you’re pretty settled in your business model now.  You’ve got your pricing pretty right, your costing right and your margin.  It sounds like you’re confident about your model.

Very confident in the model, we know it works, we know it has a lot of value to our customers.  We know there’s a large market out there and we’re still only fairly shallowly penetrated into the U.S. and globally still got a long way to go.  This is a highly scaleable business, for us now it’s in the mode of execution.  We’re kind of passed that start-up stage of what is the business model to where we’re into growth mode which is let’s scale this business and execute, that’s really our focus at the moment.

Thanks for talking to us again, Rob.

Alan, likewise, good talking to you.  Thank you.

That was Rob Newman, the CEO of Nearmap.