1Spatial — Solid progress on several geospatial fronts

In spite of global turmoil from the COVID-19 pandemic, increasing inflation and Russia’s invasion of Ukraine, 1Spatial delivered solid results in FY22. In the first year of its three-year growth plan, SPA’s FY22’s revenues grew 10% (or 13% constant currency) y-o-y to £27m supported by recurring revenue rising 15% to £12.2m.

Annualised recurring revenues (ARR), a key measure of SPA’s transition to a SaaS business with a greater portion of recurring contract revenue, also grew 26% y-o-y to £13.4m, buoyed by term licences ARR up nearly 2.5 times to £4.1m from FY21’s £1.6m. Furthermore, recurring revenue as a percentage of total revenue increased to 45% versus FY21’s 43%.

As discussed in our recent outlook note, SPA’s results were driven by expanding business across the globe, with the strategic and growing US region’s revenues up 28% (37% constant currency) y-o-y to €3.7m and UK/Ireland increasing 18% y-o-y to £9.9m. Also, Europe’s revenues rose 2% y-o-y on a constant currency basis to £10.9m.

Adjusted EBITDA rose by 15% y-o-y to €4.2m, with margins up 70bps to 15.5%, driven by increased revenues and cost management. Notably, SPA reported its first group profit before tax in over a decade, with reported profit before tax at £0.2m, up from a loss of £1.2m in FY21. Net cash fell slightly to £3.2m from FY21’s £4.3m, mostly due to working capital investments related to new contracts.

1Spatial continued to enjoy solid growth in FY22 with multiple higher-value contract wins, boosting both revenues and ARR. Notable wins included an £8m multi-year contract won as part of a consortium for a department of the UK government to implement a digital transformation programme and a £6.5m contract with the UK government’s Geospatial Commission to support Atkins (project manager) in delivering the National Underground Asset Register.

A key factor behind many wins was SPA’s focus on developing ‘smart partnerships’, as many of its largest contacts were secured via partners, including Atkins, Landmark and Qinetiq, as well as partnerships being created with Esri, a global leader in the geographic information system (GIS) industry. As we discussed in our recent outlook note, one pillar of 1Spatial’s growth strategy is to collaborate with select partners in bidding on large contracts where its role is to be a data integrity provider. In management’s view, SPA’s reputation as ‘best in breed’ is why it was chosen to perform this key role, such as its two largest contracts in company, which were both won in collaboration with strategic partners.

SPA also enjoyed several customer expansion contracts, including the Department of Environment, Food and Rural Affairs (DEFRA) for supporting its Land Management System, with a five-year contract for £1.2m, a multi-year agreement with North Ireland’s Land and Property Services to support its digital transformation program and additional licences and services for Google Real Estate and Workplace services worth US$0.9m.

Exhibit 1 shows a visual of these wins from new and existing customers, including those done via smart partnerships.

A key factor in SPA’s ‘land and expand’ strategy is the expansion of its US business. It has implemented 1Integrate and 1Data Gateway products in several influential US states, including California and Michigan, and in FY22 secured contracts with four more US states (Montana, Georgia, Minnesota and Arizona) to deliver Next Generation 911 Emergency Services systems (NG 911). The NG 911 system incorporates SPA’s 1Integrate and 1DataGateway products and enables emergency entities across the state to upload and validate their location and 911 data to comply with Next Generation 9-1-1 Act requirements.

Each contract had an average ARR of US$0.15m and services of US$0.1m, further boosting SPA’s base of recurring revenue. Management expects total ARR across the United States to grow to over US$1m in FY23 and is adding sales staff to support the US growth.

As described in Exhibit 2, management estimates that the addressable NextGen 911 market alone would be worth more than US$100m, or about US$7.5m across the 50 states and US$100m across the 23k cities and counties.

In effect, the US market provides a significant, scalable growth opportunity for SPA, with 50 states and 23,000 counties and cities, each with potentially their own 911 emergency services, department of transportation and asset management teams, each of which relies on GIS information and would likely need a solution such as 1Integrate to check, validate and cleanse their data. Moreover, there are upsell opportunities in these states, such as highway performance monitoring, crash reporting, etc. Evidence of SPA taking advantage of the scalable opportunity is its growth from only one client in 2017 (US Census) to 23 by FY22, including two federal clients, 18 states and three counties.

As Exhibit 3 portrays, SPA operates at the nexus of two large, growing markets: GIS and master data management (MDM), which management estimates to be worth US$10bn and US$12bn, respectively. The market where these two meet is the location master data management (LMDM) industry.

SPA’s platform is a set of software and components that includes its 1Integrate rules engine and 1Data Gateway self-service web portal, and allows clients to gather geospatial data from multiple sources and helps check, cleanse, validate, update and analyse the data, providing accurate location data that customers need. Moreover, its platform can be deployed as SaaS in the cloud, on-premise or as a hybrid across both.

As we explained in our outlook note, the LMDM industry is rapidly transforming with more companies using and generating more location data than ever before. Furthermore, the increasing number of companies undergoing digital transformations, numerous government infrastructure investments and the start of sustainability programs are driving the demand for tools to manage this data. After all, efficiently managing and using this data can be complex, costly and difficult, and 1Spatial’s platform seems well aligned to meet this growing demand for LMDM services and solutions.

To ensure that the platform remains what management considers best in class, SPA continues to focus on innovation. It was granted a UK patent for Modification and Validation of Spatial Data, thus protecting its rules engine technology, and SPA added support for 3D in a pilot project with a national mapping agency, automating the import of geospatial data into a 3D database and automatically validating that data with 1Integrate 3D. SPA launched its 1Spatial cloud platform to support its cloud solutions and continued enhancing its APIs so that customers can analyse their results using their own business intelligence tools. Finally, it developed several new, specific business apps such as 1Streetworks, and also apps that would enable SPA to offer validation-as-a-service (VaaS).

In our previous note on SPA’s FY22e trading update, we acknowledged that our forecasts may be conservative, given SPA’s record contract wins and sales momentum. Subsequently, SPA’s FY22 results surpassed both our revenue and EBITDA forecasts by £0.6m and £0.4m, respectively, as UK revenues were greater than we projected, though recurring term licence revenues were slightly less than we expected.

Given the trends discussed above and the solid FY22 results, we increase our FY23 revenue estimates from £27.5m to £29.0m, while forecasted EBITDA rises about £0.6m to £4.9m. We also boost our normalised basic EPS projection from 0.6p to 1.2p. While we do see continued investments in R&D to support innovation in SPA’s LMDM platform, EBITDA margins should still grow by 140bps, boosted by 7.3% sales growth in FY23e.

We also introduce FY24 forecasts, with revenues up 7.6% y-o-y to £31.2m, EBITDA up £0.8m y-o-y to £5.7m and normalised basic EPS of 2.3p versus FY23e’s 1.2p. Finally, we see net cash growing from £3.2m in FY23e to £3.5m FY24e.

At the recent 38.9p price, SPA is trading at about 1.5x FY23e revenue, a significant discount to its software peers at 4.2x (see Exhibit 5). Some of the discount could reflect its lower projected growth (7% vs peers at 12%). As noted in Exhibit 6, it trades at an 8.3x FY23e EV/EBITDA, a 50% discount to its peers such as Hexagon and IQGeo.

If SPA maintains its pace of significant contract wins, continues its expansion in the United States with scalable opportunities in NextGen 911 and keeps growing its higher-margin SaaS revenue, we expect there could be a reduction in this valuation gap. Closing the revenue multiple could take time, although our forecast for growth in FY24e (7.6% versus 10.0% consensus for peers) may bode well for SPA’s efforts to begin reducing the disparity in growth.

Achieving an FY23e sector average price/revenue multiple of 4.2x would imply a share price of 109p, a 179% premium to the current price. Reaching a peer EV/EBITDA multiple of 16.5x suggests a share price of 74p, a 91% premium to the current price.

If SPA’s partnerships generate more wins than we expect and/or if US sales can ramp up faster than we project, then a further re-rating is possible.