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Research: TMT
1Spatial’s H124 results show robust revenue growth and continued improvement in the revenue mix, with recurring revenue growing by 24%. Investment in sales resource, inflationary pressures and FX compressed margins, but a strong pipeline for both renewals and SaaS products could drive revenues and margins in H2 and beyond. In particular, the market opportunity for both 1Streetworks and NG9-1-1 has the potential to be transformative. We have upgraded our revenue forecast but leave earnings largely unchanged. Good conversion of the SaaS pipeline could justify further revisions, which may not be reflected in the current valuation.
1Spatial |
Improving mix, SaaS potential draws nearer |
H124 results |
Software and comp services |
11 October 2023 |
Share price performance
Business description
Next events
Analysts
1Spatial1Spatial is a research client of Edison Investment Research Limited |
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1Spatial’s H124 results show robust revenue growth and continued improvement in the revenue mix, with recurring revenue growing by 24%. Investment in sales resource, inflationary pressures and FX compressed margins, but a strong pipeline for both renewals and SaaS products could drive revenues and margins in H2 and beyond. In particular, the market opportunity for both 1Streetworks and NG9-1-1 has the potential to be transformative. We have upgraded our revenue forecast but leave earnings largely unchanged. Good conversion of the SaaS pipeline could justify further revisions, which may not be reflected in the current valuation.
Year end |
Revenue (£m) |
EBITDA |
EBIT* |
EPS |
EV/EBITDA |
P/E |
01/22 |
27.0 |
4.2 |
1.3 |
0.8 |
12.2 |
58.0 |
01/23 |
30.0 |
5.0 |
2.0 |
1.2 |
10.2 |
37.8 |
01/24e |
32.1 |
5.5 |
2.6 |
1.6 |
9.2 |
28.9 |
01/25e |
35.2 |
6.5 |
3.6 |
2.3 |
7.8 |
20.4 |
Note: *EBIT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H124 results: Improving revenue mix
1Spatial reported an 11% y-o-y increase in revenue to £15.5m, with recurring revenue up 24% to £8.2m (53% of revenue) and gross margin expanded 221bp to 52%, reflecting the continued migration to a recurring software model. Investment in the sales function, inflationary pressure and FX resulted in adjusted EBITDA reducing to £1.6m versus £2.0m in H123, while net cash reduced to £0.5m (H123: £2.3m). We believe that a strong pipeline of renewals, combined with cost efficiencies, should grow revenue, profits and cash in H2 and beyond.
Enterprise drives growth, SaaS pipeline maturing
Growth in H1 was delivered primarily by the enterprise business and we see good opportunities for sustained double-digit growth with these products. A maturing pipeline for the company’s SaaS (1Streetworks and NG9-1-1) products underpins the potential operationally geared growth. The company is also in the final stages of contracting its first annual licence for 1Streetworks following the successful completion of a trial, where management expects a strong return on investment for the customer to provide a pivotal case study. Management’s identified market opportunity has expanded from £250m to £400m, catalysed by the UK’s electrification of roads and fibre roll-out. New contract wins for its enterprise offering and NG9-1-1 contracts provide tools for cross-selling and expansion in the US, where management believes there is a US$350m opportunity for its SaaS solution.
Valuation: SaaS potential not priced in
On our updated estimates, 1Spatial trades at an average 56% discount to our peer group on an EV/sales basis across FY1 and FY2, falling to 41% on EV/EBITDA. However, these forecasts do not reflect the potential for an acceleration in operationally geared growth driven by uptake of the company’s SaaS products. Good progress in converting and building the pipeline over the course of the next 12 months could be a catalyst for both earnings revisions and a stock re-rating.
H1 results summary and changes to forecasts
In H123, the group reported an 11% y-o-y increase in revenue to £15.5m and delivered on its strategy of selling repeatable business solutions on longer-term contracts, rather than one-off perpetual licences. Success in this strategy is highlighted by a 24% increase in recurring revenue and reflected in a 221bp expansion in gross margins as a result of the improved revenue mix.
Enterprise business drives growth in H1
Growth in H1 was delivered primarily by the enterprise business.
The US was the most significant contributor to recurring revenue growth, up 56% y-o-y. Its core enterprise offering continues to see momentum, with the group winning its first contract with the State of Oregon worth US$0.4m over two years. Following this, 1Spatial now has 18 US states as customers, all of which have significant upsell potential – as highlighted through the additional sale of 1Integrate licences with its existing Federal Highways contracts, growing annual recurring revenue (ARR) on the account to US$200k from US$150k. Contract growth has been supported by the new head of sales in the US, who also delivered five new contracts for its NG-9-1-1 SaaS solution. Management believes the solution is suitable for the counties and cities in each US state and presents a US$345m ARR opportunity.
The UK also saw robust growth, underpinned by its first contract with Yorkshire Water Services for £650k, a two-year extension with Ordnance Survey Great Britain for c £1.5m and the delivery of the first phase of the National Underground Asset Register project. Also in the period, the group signed five new trials for 1Streetworks and has more than 30 in early pipeline discussions.
Encouragingly, the group won its first 1Integrate licence in Australia, worth more than A$200k for an initial six months, with the possibility to extend.
Growth drivers for the enterprise business remain robust
We continue to see strong growth prospects for the company’s core enterprise offerings. Market analysts estimate the total size of the geographic information systems market at between US$10bn and US$12bn, and for the market to grow at a healthy low to mid-teens rate, almost tripling in size between 2022 and 2030. Overall, performance has been resilient – in a declining economic environment, these estimates have been progressively nudged up.
1Spatial’s core competence of bringing data together from different sources, making sure it is both accurate and consistent and enabling it to be maintained, will be key to many projects where location data is key.
SaaS pipeline maturing
1Spatial’s key SaaS solutions, 1Streetworks and NG9-1-1 provide the potential for an inflection in growth and margin performance. The company reported further progress in developing the pipeline for both in H1.
The company now estimates the addressable market for 1Streetworks, its traffic plan automation product, at £400m annually for the UK’s low-speed roads alone, up from £250m previously. Management’s uplift reflects the planned electrification of roads and the roll-out of new telecoms fibre, which could increase annual roadworks from 2.5m to 4m. 1Spatial is targeting a 25–30% share of this market and is currently in more than 32 early pipeline discussions, in addition to the five trials it won in H2 (see Exhibit 1). We note that each deal has the potential to generate between £100k and £3m of ARR with the potential for expansion.
Exhibit 1: Summary of trials and pipeline for 1Streetworks
Local authorities |
Utilities |
Traffic management companies |
Maintenance companies |
|
Number of trials |
1 |
3 |
1 |
- |
Pipeline |
11 |
7 |
5 |
9 |
Source: 1Spatial
The addressable market for NG9-1-1 is worth more than US$350m in ARR, underpinned by the assigned US$500m of government funding for NG9-1-1 projects. The company has secured five contracts in the first four months of launch, highlighting the strong demand for the product. The target is to achieve a 10–15% market share, where its planned Q424 integration with key partner Esri’s platform will help drive adoption.
Estimate changes
We have raised our FY24 revenue forecasts to reflect this momentum, with H2 historically the stronger period for the group. We have also raised our FY25 expectations, underpinned by the potential conversion of SaaS product trials into long-term recurring revenue licences, as well as from current structural tailwinds driven by the need for clean, consistent data to drive AI applications, digital twins, etc. Its SaaS contracts in particular are high gross margin, c 80–90%, which we reflect in our forecasts.
Exhibit 2: Summary of changes to forecasts
£'000s |
FY24e |
FY25e |
|||||||
Old |
New |
Change |
y-o-y change (%) |
Old |
New |
Change |
y-o-y change (%) |
||
Revenue |
31,411 |
32,132 |
2% |
7% |
33,610 |
35,185 |
5% |
10% |
|
y-o-y growth |
5% |
7% |
2% |
-4% |
7% |
10% |
2% |
2% |
|
Gross profit |
16,648 |
17,512 |
5% |
14% |
18,150 |
19,528 |
8% |
12% |
|
Gross margin |
53% |
55% |
2% |
3% |
54% |
56% |
2% |
1% |
|
Adjusted EBITDA |
5,202 |
5,541 |
7% |
11% |
6,246 |
6,539 |
5% |
18% |
|
Adjusted EBITDA margin |
17% |
17% |
1% |
1% |
19% |
19% |
0% |
1% |
|
Normalised operating income |
2,222 |
2,561 |
15% |
30% |
3,266 |
3,559 |
9% |
39% |
|
Normalised net income |
1,527 |
1,781 |
17% |
31% |
2,310 |
2,530 |
10% |
42% |
|
Reported net income |
1,077 |
1,416 |
31% |
34% |
1,876 |
2,096 |
12% |
48% |
|
Adjusted EPS diluted (p) |
1.34 |
1.57 |
17% |
29% |
2.03 |
2.22 |
9% |
42% |
|
Free cash flow (pre-lease payments) |
377 |
(506) |
-234% |
-136% |
656 |
2,098 |
220% |
-514% |
|
Net debt/(cash) |
(3,431) |
(2,548) |
-26% |
-17% |
(4,086) |
(4,646) |
14% |
82% |
|
Source: Edison Investment Research
In the first half, investments in sales efforts, inflationary pressures and adverse FX movements resulted in a 3pp reduction in adjusted EBITDA margin to 11%. Management has identified c £1m in annualised cost saving opportunities from non-revenue generating activities, which they believe will offset this cost impact in H2.
We reflect this in our full year forecast, raising EBITDA to £5.5m at the same margin as we had previously. The group also believes that larger weighting of term licence renewals in H2 will also help recoup the EBITDA shortfall over the next six months. In FY25, we forecast the EBITDA margin to expand to 19% through operating leverage, given that most of the investment in cloud-based SaaS solutions has already been incurred.
We moderate our net cash assumptions for the year, having a more cautious view on working capital movements in H2.
Exhibit 3: Financial summary
£'000s |
2021 |
2022 |
2023 |
2024e |
2025e |
||
Year-end 31 January |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
24,600 |
27,027 |
30,002 |
32,132 |
35,185 |
Cost of Sales |
(11,451) |
(13,078) |
(14,504) |
(14,620) |
(15,657) |
||
Gross Profit |
13,149 |
13,949 |
15,498 |
17,512 |
19,528 |
||
EBITDA |
|
|
3,632 |
4,182 |
4,997 |
5,541 |
6,539 |
Normalised operating profit |
|
|
435 |
1,302 |
2,026 |
2,561 |
3,559 |
Amortisation of acquired intangibles |
(917) |
(561) |
(386) |
(386) |
(386) |
||
Exceptionals |
(492) |
0 |
(194) |
0 |
0 |
||
Share-based payments |
(272) |
(326) |
(192) |
(192) |
(192) |
||
Reported operating profit |
(1,246) |
415 |
1,254 |
1,983 |
2,981 |
||
Net Interest |
(187) |
(195) |
(210) |
(186) |
(186) |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
248 |
1,107 |
1,816 |
2,375 |
3,373 |
Profit Before Tax (reported) |
|
|
(1,433) |
220 |
1,044 |
1,797 |
2,795 |
Reported tax |
308 |
163 |
14 |
(381) |
(699) |
||
Profit After Tax (norm) |
198 |
886 |
1,362 |
1,781 |
2,530 |
||
Profit After Tax (reported) |
(1,125) |
383 |
1,058 |
1,416 |
2,096 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
198 |
886 |
1,362 |
1,781 |
2,530 |
||
Net income (reported) |
(1,125) |
383 |
1,058 |
1,416 |
2,096 |
||
Basic average number of shares outstanding (m) |
112 |
112 |
111 |
111 |
111 |
||
EPS - basic normalised (p) |
|
|
0.18 |
0.80 |
1.23 |
1.61 |
2.28 |
EPS - diluted normalised (p) |
|
|
0.17 |
0.77 |
1.20 |
1.57 |
2.22 |
EPS - basic reported (p) |
|
|
(1.01) |
0.35 |
0.95 |
1.28 |
1.89 |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
5.2 |
9.9 |
11.0 |
7.1 |
9.5 |
||
Gross Margin (%) |
53.5 |
51.6 |
51.7 |
54.5 |
55.5 |
||
EBITDA Margin (%) |
14.8 |
15.5 |
16.7 |
17.2 |
18.6 |
||
Normalised Operating Margin |
1.8 |
4.8 |
6.8 |
8.0 |
10.1 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
18,273 |
17,100 |
19,319 |
20,235 |
21,151 |
Intangible Assets |
15,187 |
15,003 |
17,408 |
18,372 |
19,336 |
||
Tangible Assets |
3,086 |
2,097 |
1,911 |
1,863 |
1,815 |
||
Investments & other |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
18,332 |
18,018 |
19,222 |
20,675 |
22,777 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
10,890 |
12,271 |
14,151 |
16,110 |
16,114 |
||
Cash & cash equivalents |
7,278 |
5,623 |
5,036 |
4,530 |
6,628 |
||
Other |
164 |
124 |
35 |
35 |
35 |
||
Current Liabilities |
|
|
14,813 |
14,903 |
17,093 |
17,826 |
18,556 |
Creditors |
13,418 |
13,284 |
15,797 |
16,558 |
17,288 |
||
Tax and social security |
0 |
0 |
0 |
0 |
0 |
||
Short term borrowings |
470 |
531 |
660 |
660 |
660 |
||
Other |
925 |
1,088 |
636 |
608 |
608 |
||
Long Term Liabilities |
|
|
7,057 |
5,110 |
4,097 |
4,097 |
4,097 |
Long term borrowings |
2,542 |
1,861 |
1,322 |
1,322 |
1,322 |
||
Other long term liabilities |
4,515 |
3,249 |
2,775 |
2,775 |
2,775 |
||
Net Assets |
|
|
14,735 |
15,105 |
17,351 |
18,987 |
21,275 |
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Shareholders' equity |
|
|
14,735 |
15,105 |
17,351 |
18,987 |
21,275 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
2,961 |
4,048 |
4,593 |
5,169 |
6,167 |
||
Working capital |
791 |
(1,578) |
537 |
(1,198) |
727 |
||
Exceptional & other |
52 |
(107) |
12 |
(841) |
(842) |
||
Tax |
484 |
176 |
179 |
(381) |
(699) |
||
Net operating cash flow |
|
|
4,288 |
2,539 |
5,321 |
2,749 |
5,353 |
Capex |
(2,312) |
(2,613) |
(4,017) |
(3,255) |
(3,255) |
||
Acquisitions/disposals |
(585) |
0 |
0 |
0 |
0 |
||
Net interest |
0 |
0 |
0 |
0 |
0 |
||
Equity financing |
0 |
0 |
14 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
585 |
(1,708) |
(1,994) |
0 |
0 |
||
Net Cash Flow |
1,976 |
(1,782) |
(676) |
(506) |
2,098 |
||
Opening net debt/(cash) |
|
|
(3,887) |
(4,403) |
(3,231) |
(3,054) |
(2,548) |
FX |
194 |
127 |
89 |
0 |
0 |
||
Other non-cash movements |
(1,654) |
483 |
410 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(4,403) |
(3,231) |
(3,054) |
(2,548) |
(4,646) |
Source: Company accounts, Edison Investment Research
|
|
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