1Spatial — New SaaS apps to drive high-margin growth

1Spatial (AIM: SPA)

Last close As at 20/05/2024

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Research: TMT

1Spatial — New SaaS apps to drive high-margin growth

1Spatial’s full year results confirm the solid progress made over the course of the year with revenue growing 11%, recurring revenues growing 21% and EBITDA margins expanding from 15.5% to 16.7%. With momentum continuing into this year, and a healthy order book and pipeline, the company looks well set for 2024. Progress in its key strategic growth pillars – traffic management, US expansion and smart partnerships – looks promising and could accelerate scalable high-margin recurring revenue growth. Investment in key sales hires suppresses our profitability estimates for FY24, but we expect this to start delivering returns in the form of faster growth and margin expansion from FY25.

Max Hayes

Written by

Max Hayes

Associate Analyst

TMT

1Spatial

New SaaS apps to drive high-margin growth

FY23 results

Software and comp services

2 May 2023

Price

47p

Market cap

£52m

Net cash (£m) at 31 January 2023

3.1

Shares in issue

110.7m

Free float

79%

Code

1SPA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.1)

(8.7)

10.4

Rel (local)

(5.4)

(8.8)

7.0

52-week high/low

54p

39p

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 of data.

Next events

H124 results

September 2023

Analysts

Max Hayes

+44 (0)20 3077 5721

Dan Ridsdale

+44 (0)7930 166512

1Spatial is a research client of Edison Investment Research Limited

1Spatial’s full year results confirm the solid progress made over the course of the year with revenue growing 11%, recurring revenues growing 21% and EBITDA margins expanding from 15.5% to 16.7%. With momentum continuing into this year, and a healthy order book and pipeline, the company looks well set for 2024. Progress in its key strategic growth pillars – traffic management, US expansion and smart partnerships – looks promising and could accelerate scalable high-margin recurring revenue growth. Investment in key sales hires suppresses our profitability estimates for FY24, but we expect this to start delivering returns in the form of faster growth and margin expansion from FY25.

Year

end

Revenue
(£m)

EBITDA
(£m)

EBIT*
(£m)

EPS*
(p)

EV/EBITDA
(x)

P/E
(x)

01/22

27.0

4.2

1.3

0.8

11.7

58.7

01/23

30.0

5.0

2.0

1.2

9.8

38.2

01/24e

31.4

5.2

2.2

1.4

9.4

34.1

01/25e

33.6

6.2

3.3

2.1

7.8

22.5

Note: *EBIT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY23: Growth, improving mix and investment

1Spatial delivered a robust financial performance, slightly above our forecasts, in FY23. Revenues grew by 11% to £30m (Edison £29.8m), but within this, recurring revenues grew by 21% to £14.8m of which recurring term licences grew by 110% to £5.3m. Annualised recurring revenue grew by 17% to £15.8m. Profitability increased markedly with EBITDA expanding 19% to £5m, operating profit by 202% to £1.3m and normalised EPS up 200% to 1.0p. Net cash of £3.1m was broadly unchanged on last year (£3.2m) in part due to higher capitalised development costs (£3.9m up from £2.5m last year) reflecting the work in completing development of the cloud platform and SaaS products, which underpin the growth strategy.

SaaS and partner sales key to scalable growth

With 1Spatial’s cloud platform launched, key SaaS products being trialled and an expanding partner base with the likes of Atkins, QinetiQ and CGI, we believe that 1Spatial has now established a platform for sustained scalable growth. The company is investing in a number of senior sales hires to consolidate the opportunity, which reduces our FY24 EBITDA by 9% to £5.2m and normalised diluted EPS by 42% to 1.3p. However, for FY25 we forecast an acceleration in growth and margin expansion, which should be sustainable. Newsflow on SaaS and partner-led sales should give a good lead indicator on how strong this inflection could be.

Valuation: Scalable growth potential not priced in

1Spatial trades at 1.6x FY25 sales, a significant discount to peers, and 22.5x FY25 earnings, a small discount to peers. However, if the company delivers on its strategy, FY25 should only be an early stage of the margin expansion journey, with at least 20% operating margins (vs 10% forecast for FY25) being achievable in the medium term. We believe that this potential is far from being priced in, and newsflow over the year could be the catalyst for an upwards re-rating.

Three pillars for sustainable growth

1Spatial delivered another year of solid financial progress in FY23, while investing back into the business to establish a platform for accelerated, recurring, scalable growth. In FY24 we expect to see tangible evidence of this investment starting to bear fruit, in the form of initial deal flow for the company’s SaaS products and increased sales through strategic partners. We continue to believe that good progress on this front has the potential to drive upside to our FY24 estimates, although given the shift towards term/subscription revenues, any benefit is likely to come through more strongly in 2025 and beyond.

The company’s three key areas of focus for FY24 are 1Streetworks, US expansion and strategic partnerships.

1Streetworks: Traffic management plan automation

Building on the company’s core platform, 1Spatial is developing a suite of application-specific SaaS based solutions, opening up opportunities with new customers and significantly increasing the company’s total addressable market. Two of these solutions, 1Streetworks and Next-Generation 911 (discussed later), look particularly promising.

Management believes that 1Streetworks is the first solution in the market to full automate the production of traffic management plans. The benefits include ensuring compliance with rules, better accuracy and significantly reducing the time and cost to implement a new plan.

1Spatial’s initial focus is on the UK, where management estimates that it costs c £500m per annum to create traffic management plans manually, for the UK’s low speed roads alone.

The company is reporting very strong interest and a significant pipeline of opportunities, with the first deals now moving through the procurement process in the form of paid trials or limited deployments. We believe that good uptake over the course of FY24 could be a catalyst for upside in our FY25 estimates. Management believes that 1Streetworks presents a £250m per year opportunity in the UK alone; adaptation of the product for the United States and other overseas markets could substantially expand the market opportunity in future years.

US expansion

Geographically, the United States represents a very significant opportunity for 1Spatial and the company is now showing promising progress. It has demonstrated its ability to sell in the United States, having expanded its client base from just once one client in the US (US Census) in 2017 to more than 30 now, with many more in the pipeline. Revenues are growing strongly, albeit from a relatively modest base; FY23 US revenues grew 16% to £4.3m, with recurring revenues growing by 45% in constant currency terms.

In the near term, the most significant opportunity comes from 1Spatial’s Next-Generation 911 (NG 911) solution, although sales of other products are also being made. The company’s initial focus has been on building its customer base at the state level. The NG 911 solution has now been implemented in eight US states, leaving plenty of headroom for growth into the remaining 42. Operating a ‘land and expand’ strategy, management believes that with successful cross-selling the company has the potential to grow annual recurring revenue (ARR) to c $1m per state, adding up to a $50m addressable market. The development of a SaaS NG 911 solution through its recently launched cloud platform also opens up opportunities with the 23,000 counties and cities in the United States. Initial pilots are underway and progress over the year should give better visibility on how easily this opportunity, estimated at c $100m by management, will be unlocked.

Strategic partnerships

1Spatial has made good progress in expanding its roster of technology, delivery and sales partnerships in FY23, which now includes a number of influential names. Management highlights that this has already played an important role in securing new customers and demonstrating the credibility of its business, and further progress should provide a very meaningful boost to the company’s drive to deliver scalable growth.

New implementation and sales partnerships were signed with CGI (a multinational end-to-end consultancy), ATOS and Rizing (part of Wipro), with the Rizing partnership key to winning a four-year contract with the California Department of Transportation. 1Spatial is also increasingly being selected as the data integrity provider within a consortium, cleansing data before passing it through wider systems. New partnerships here include Atkins, QinetiQ and Landmark, joining existing partners Version1 and Ordnance Survey. Within the GIS ecosystem, the company’s long-term partnership with Esri (the leading GIS provider globally) continues to develop, while other partners include Hexagon, What3Words and Ordnance Survey.

FY23 results review

1Spatial’s FY23 results were slightly ahead of our forecasts, with revenue up 11% y-o-y to £30m and the group reporting robust growth across all regions. Recurring revenue grew by 21% in the year to £14.8m (49% of total revenue, +4pp y-o-y), of which higher-margin recurring term licences grew by 110% to £5.3m.

Exhibit 1: Summary of FY23 results, changes to forecasts and FY25e introduction

£'k

FY23

FY24e

FY25e

Forecast

Actual

Change

y-o-y change

Old

New

Change

y-o-y change

New

y-o-y change

Revenue

29,800

30,002

1%

11%

31,200

31,411

1%

5%

33,610

7%

y-o-y growth

10%

11%

1%

1%

5%

5%

0%

-6%

7%

2%

Gross profit

15,317

15,498

1%

11%

16,099

16,648

3%

9%

18,150

9%

Gross margin

51%

52%

0%

0%

52%

53%

1%

2%

54%

1%

Adjusted EBITDA

4,906

4,997

2%

19%

5,699

5,202

-9%

6%

6,246

20%

Adjusted EBITDA margin (%)

16%

17%

0%

1%

18%

17%

-2%

0%

19%

2%

Normalised operating income

1,967

2,026

3%

56%

2,720

2,222

-18%

13%

3,266

47%

Normalised net income

1,335

1,362

2%

54%

2,527

1,527

-40%

14%

2,310

51%

Reported net income

615

1,058

72%

176%

1,142

1,077

-6%

75%

1,876

74%

Adjusted EPS diluted (p)

1.21

1.20

-1%

56%

2.28

1.34

-41%

11%

2.03

51%

Free cash flow (pre-lease payments)

1,388

1,304

-6%

493%

2,188

377

-83%

-73%

656

74%

Net debt/(cash)

(3,139)

(3,054)

-3%

-5%

(4,167)

(3,431)

-18%

9%

(4,086)

19%

Source: 1Spatial, Edison Investment Research

Profitability improved substantially, with the adjusted EBITDA margin expanding by 120bp y-o-y to 16.7%, while operating profit also expanded 56% to £2m. The company is still in an investment phase, investing operating cash flows into R&D to consolidate the transformation to a higher-growth, scalable SaaS business. Free cash flow was £253k versus an outflow of £868k last year despite significantly increased capitalised R&D costs (£3.9m up from £2.5m last year) and a deferred consideration payment of £352k. Net cash of £3.1m was broadly unchanged on last year (£3.2m).

The group believes its SaaS-based applications can deliver an 80–90% gross margin, which should drive future margin expansion, particularly now that the investments in its platform are largely complete.

Changes to forecasts and introduction to FY25e

FY24: Continued investment but positive cash generation

We leave our FY24 top-line assumptions materially unchanged, underpinned by the robust growth in FY23 ARR, strong backlog and pipeline. The company is continuing to invest to capitalise on the longer-term opportunity, with the hire of three new sales executives in the UK, United States and France the main factor behind the reduction in our adjusted EBITDA forecast by 9% to £5.2m in FY24. The c 40% reduction in our FY24 EPS estimate reflects a higher forecast tax charge on top of the operating downgrade. We have also reduced our net cash forecast for the year by 18% to £3.4m, reflecting our lower profit estimates.

FY25: Starting to reap the rewards

We believe that factors are aligning to support a potential acceleration in new business in FY24 and beyond. However, given the company’s shift to a more recurring revenue profile, the benefits of this are likely to reflect more strongly in the FY25 financial performance onwards.

We forecast a 7% y-o-y increase in FY25 revenue to £33.6m, with a continued mix shift towards higher-margin recurring software revenues. With operating leverage, we forecast a 193bp increase in the adjusted EBITDA margin in FY25 to 19%, despite continued growth in sales and marketing costs. At this level, the company should start generating positive cash flows and we forecast a 19% rise in net cash to £4.1m by end FY25.

Potential for significant growth and margin expansion

We believe that 1Spatial is establishing a promising platform, with the potential to deliver a sustained acceleration in scalable growth. Strong execution will be required, but the market opportunity is significant, the company is establishing an impressive roster of partners and its product market fit looks strong. We can see potential for upside to our FY25 estimates and in the longer term see potential for margins to expand significantly north of our 10% operating margin estimate for that year. Established software/SaaS peers typically command 20%+ operating margins, which we see as a viable target for 1Spatial if its transformation is executed successfully.

Exhibit 2: Financial summary

£'k

2021

2022

2023

2024e

2025e

Year end 31 January

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

7.5

27,027

30,002

31,411

33,610

Cost of Sales

(11,451)

(13,078)

(14,504)

(14,763)

(15,461)

Gross Profit

13,149

13,949

15,498

16,648

18,150

EBITDA

 

 

3,632

4,182

4,997

5,202

6,246

Normalised operating profit

 

 

435

1,302

2,026

2,222

3,266

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

1,644

2,688

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

2,036

3,080

Profit Before Tax (reported)

 

 

(1,433)

220

1,044

1,458

2,502

Reported tax

308

163

14

(381)

(625)

Profit After Tax (norm)

198

886

1,362

1,527

2,310

Profit After Tax (reported)

(1,125)

383

1,058

1,077

1,876

Minority interests

0

0

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

198

886

1,362

1,527

2,310

Net income (reported)

(1,125)

383

1,058

1,077

1,876

Basic average number of shares outstanding (m)

112

111

111

111

111

EPS - basic normalised (p)

 

 

0.18

0.80

1.23

1.38

2.08

EPS - diluted normalised (p)

 

 

0.17

0.77

1.20

1.34

2.03

EPS - basic reported (p)

 

 

(1.01)

0.35

0.95

0.97

1.69

Dividend (p)

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

5.2

9.9

11.0

4.7

7.0

Gross Margin (%)

53.5

51.6

51.7

53.0

54.0

EBITDA Margin (%)

14.8

15.5

16.7

16.6

18.6

Normalised Operating Margin (%)

1.8

4.8

6.8

7.1

9.7

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

20,336

22,218

Stocks

0

0

0

0

0

Debtors

10,890

12,271

14,151

14,888

16,115

Cash & cash equivalents

7,278

5,623

5,036

5,413

6,068

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

18,648

20,716

Minority interests

0

0

0

0

0

Shareholders' equity

 

 

14,735

15,105

17,351

18,648

20,716

CASH FLOW

Op Cash Flow before WC and tax

2,961

4,048

4,593

4,830

5,874

Working capital

791

(1,578)

537

24

(496)

Exceptional & other

52

(107)

12

(841)

(842)

Tax

484

176

179

(381)

(625)

Net operating cash flow

 

 

4,288

2,539

5,321

3,632

3,911

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)

377

656

Opening net debt/(cash)

 

 

(3,887)

(4,403)

(3,231)

(3,054)

(3,431)

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)

(3,431)

(4,086)

Source: Edison Investment Research, company accounts

General disclaimer and copyright

This report has been commissioned by 1Spatial and prepared and issued by Edison, in consideration of a fee payable by 1Spatial. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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General disclaimer and copyright

This report has been commissioned by 1Spatial and prepared and issued by Edison, in consideration of a fee payable by 1Spatial. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Dowlais Group — A premium automotive business

The listing of Dowlais in April 2023 launched the GKN group of automotive components businesses, market-leading automotive driveline and powder metallurgy manufactured components, as a standalone entity. Leveraging automotive market recovery over a restructured cost base is expected to deliver strong margin expansion as automotive markets return to pre-COVID-19 peak levels. This should drive earnings growth, confirming the ‘premium’ tag, driving the valuation.

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