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Delays and disposals

1Spatial 21 December 2016 Review

1Spatial

Delays and disposals

Profit warning

Software & comp services
 

21 December 2016

Price

1.95p

Market cap

£14m

Estimated net debt (£m) at end FY17

1.0

Shares in issue

738.1m

Free float

83%

Code

SPA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.8)

(55.9)

(63.4)

Rel (local)

(14.7)

(57.0)

(67.9)

52-week high/low

5.4p

1.9p

Business description

1Spatial’s core technology validates, rectifies and enhances customers’ geospatial data. The combination of its software and advisory services reduces the need for costly manual checking and correcting data.

Next events

Full year results

April 2017

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Bridie Barrett

+44 (0)20 3077 5700

1Spatial is a research client of Edison Investment Research Limited

1Spatial’s pipeline has not converted as expected thus far in H2, and given the shift to a subscription weighted model, such deals which do come in between now and the end of January are unlikely to contribute significantly to the P&L. As a result the company expects to be marginally loss-making at the EBITDA level versus our £3.7m profit previously. We welcome the exit from the non-core Avisen and Storage Fusion businesses in the name of improving focus. We still believe that the company’s core strategy of building the GIS business around higher-margin and recurring revenue lines is sound, although – as is often the case – the transition is proving more protracted and painful than initially anticipated.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

EV/Sales (x)

P/E (x)

01/15

19.6

1.8

0.27

0.0

0.8

7.2

01/16

20.7

2.0

0.29

0.0

0.7

6.7

01/17e

23.9

(2.4)

(0.33)

0.0

0.6

N/A

01/18e

23.7

(0.7)

(0.09)

0.0

0.6

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Licensing delays and business model shift

The shortfall is attributed to a number of factors including delays in closing high-margin licensing deals and the migration towards a recurring subscription model at the expense of licensing revenues. While the Esri partnership remains potentially transformative, it is taking longer than anticipated to convert this relationship into an effective sales channel. The company maintains that the pipeline remains robust, with over 50 deals of various sizes.

Disposals of non-core businesses should help focus

The company has disposed of Avisen (FY16 revenue £1.4m, £0.3m EBIT, but broadly break-even thus far this year) for £0.1m to management. Storage Fusion (FY16 revenue £0.2m, £0.3m EBIT) has been closed. This leaves just Enables IT, a provider of hosted/cloud-based managed services, which is seen as complementary to the GIS operations in the company’s Cloud Services division. Other opportunities for reducing costs are also being explored.

Estimate downgrades

We have reduced our FY17e revenues by 15% to £23.9m, with EBITDA dropping to a £0.3m loss from a £3.7m profit previously. We now forecast a year-end net debt position of £1m versus £1m net cash previously. 1Spatial has a £3m facility. Visibility for FY18 is clearly limited but, taking a cautious stance, we reduce our revenue and EBITDA by 19% and 58% respectively (detailed overleaf).

Valuation: Need evidence of a turning point

We believe that management’s strategy of growing the GIS business around higher-margin and recurring revenue streams is sound. The FY17e EV/Sales rating of 0.6x is also low for a product-based software business, but evidence of a turning point in financial performance will be required before this discount starts to close.

Estimate changes

Our estimate changes are shown below. The profit warning stems from a recent pipeline review and while there are still large deals which could close between now and year-end (Jan) the shift towards a more subscription weighted model will mean that such deals will not contribute significantly to this year’s P&L.

We have reduced our FY18 operating costs forecasts for the GIS business slightly although there may be scope for further reductions.

We believe that the key forward indicators of a sustainable recovery in financial performance will be 1) growth in bookings, especially through the company’s GIS partners Esri and Here and 2) further progress in the US, 3) uptake of other recurring business lines, such as Managed GIS services and 4) extension of the company’s GIS partner base.

Exhibit 1: Estimate changes

2015

2016

2017e

2018e

£000s

Actual

Actual

Old

New

Change (%)

Old

New

Change (%)

Recurring subscription income from partners

0

0

400

300

(25)

1,050

900

(14)

Other geospatial

0

15,957

17,457

14,106

(19)

18,679

15,234

(18)

Geospatial

17,934

15,957

17,857

14,406

(19)

19,729

16,135

(18)

Cloud services/other

1664

4,781

10,194

9,500

(7)

9,684

7,600

(22)

Group revenue

19,598

20,738

28,051

23,906

(15)

29,413

23,735

(19)

Cost of goods sold

(8,804)

(8,960)

(14,718)

(15,957)

8%

(14,617)

(13,317)

9

Gross profit

10,794

11,778

13,333

7,949

(40)

14,796

10,417

(30)

% gross profit margin

55%

57%

48%

33%

50%

44%

EBITDA

3,052

3,677

3,713

(283)

N/M

4,640

1,962

(58)

Operating profit (before GW and except.)

1,857

2,485

1,713

(2,283)

N/M

2,211

(467)

N/M

EPS - normalised fully diluted (p)

0.27

0.29

0.22

(0.33)

N/M

0.27

(0.09)

N/M

Net debt/(cash)

(7,817)

(4,996)

(1,001)

1,046

N/M

(1,016)

3,097

N/M

Source: Company data, Edison Investment Research estimates

Exhibit 2: Financial summary

£'000s

2015

2016

2017e

2018e

Year end 31 January

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

19,598

20,738

23,906

23,735

Delivery costs

(8,804)

(8,960)

(15,957)

(13,317)

Gross Profit

10,794

11,778

7,949

10,417

EBITDA

 

 

3,052

3,677

(283)

1,962

Operating Profit (before amort. and except.)

1,857

2,485

(2,283)

(467)

Acquired Intangible Amortisation

(255)

(709)

(1,000)

(1,000)

Exceptionals

(2,345)

(1,140)

(500)

0

Share based payments

(723)

(977)

(977)

(977)

Operating Profit

(1,466)

(341)

(4,760)

(2,444)

Net Interest

(56)

(31)

74

(15)

Other

0

(421)

(200)

(200)

Profit Before Tax (norm)

 

 

1,801

2,033

(2,409)

(682)

Profit Before Tax (FRS 3)

 

 

(1,522)

(793)

(4,886)

(2,659)

Tax

5

805

977

532

Profit After Tax (norm)

1,801

2,033

(2,409)

(682)

Profit After Tax (FRS 3)

(1,517)

12

(3,909)

(2,127)

Average Number of Shares Outstanding (m)

650.4

691.3

729.5

739.5

EPS - normalised (p)

 

 

0.28

0.29

(0.33)

(0.09)

EPS - normalised fully diluted (p)

 

 

0.27

0.29

(0.33)

(0.09)

EPS - (IFRS) (p)

 

 

(0.23)

0.00

(0.54)

(0.29)

Dividend per share (p)

0.0

0.0

0.0

0.0

Gross Margin (%)

55.1

56.8

33.3

43.9

EBITDA Margin (%)

15.6

17.7

N/A

8.3

Operating Margin (before GW and except.) (%)

9.5

12.0

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

15,781

22,074

24,603

25,027

Intangible Assets

14,729

18,859

21,588

23,789

Tangible Assets

552

1,638

1,438

1,238

Investments

500

1,577

1,577

0

Current Assets

 

 

16,831

16,202

12,306

12,306

Stocks

0

0

0

0

Debtors

7,453

10,815

11,915

11,915

Cash

8,250

4,996

0

0

Other

1,128

391

391

391

Current Liabilities

 

 

(9,716)

(11,030)

(11,190)

(13,841)

Creditors

(9,474)

(11,030)

(10,144)

(10,744)

Short term borrowings

(242)

0

(1,046)

(3,097)

Long Term Liabilities

 

 

(1,888)

(1,579)

(1,579)

(1,579)

Long term borrowings

(191)

0

0

0

Other long term liabilities

(1,697)

(1,579)

(1,579)

(1,579)

Net Assets

 

 

21,008

25,667

24,140

21,913

CASH FLOW

Operating Cash Flow

 

 

353

(771)

(3,469)

1,862

Net Interest

(56)

179

74

(15)

Tax

5

(105)

977

532

Capex

(2,621)

(3,800)

(3,601)

(3,601)

Acquisitions/disposals

(500)

(1,498)

(928)

(828)

Financing

(209)

3,092

905

0

Dividends

0

0

0

0

Net Cash Flow

(3,028)

(2,903)

(6,042)

(2,051)

Opening net debt/(cash)

 

 

(10,845)

(7,817)

(4,996)

1,046

HP finance leases initiated

0

0

0

0

Other

0

82

0

0

Closing net debt/(cash)

 

 

(7,817)

(4,996)

1,046

3,097

Source: Company data, Edison Investment Research

 

 

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by 1Spatial and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by 1Spatial and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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