Positive on growth prospects remain strong despite near-term headwinds
1Spatial has been investing in its transition to a higher-margin, recurring software
model for a number of years, which is reflected in the 35% growth in software sales
(term licence and SaaS) to £11.5m in FY25. The company is exposed to some end markets
that are disrupted however, particularly US government, where factors such as the
change of government and DOGE initiatives will inevitably make closing business more
difficult. Moreover, in 1Streetworks, we believe that 1Spatial has a highly promising
product, but it does introduce new workflows into a conservative industry, so driving
uptake takes time and investment.
Nevertheless, we remain confident that 1Spatial is laying the groundwork to deliver
an uptick in operationally leveraged growth:
Structurally well-placed: Most fundamentally, we believe that 1Spatial’s core competence and IP in geospatial
master data management puts the company in an attractive position. Extracting value
from datasets is becoming a core business competence across many sectors. The company
also operates in markets that are under-digitised, in which collecting, managing and
leveraging geospatial data can play a major role in driving efficiency, collaboration
and supporting AI and Digital Twin initiatives.
1Streetworks: As discussed earlier, penetrating this market is taking time. However, in UK Power
Networks, Surrey and Kent County Councils the company now has an established reference
customer base. UK Power Networks is a positive advocate for the product, and Kent
County Council’s estimate that using the product could support a reduction in road
closures of 40% is extremely noteworthy. The company reports that several new 1Streetworks
contracts are in the final stages of negotiation. Closure of these deals will grow
the company’s recurring revenue base and should reduce reticence elsewhere in the
market. The ability of the platform to enable collaboration between different agencies
is delivering significant benefits, which should support sales uptake between adjacent
agencies. These network effects should grow as the customer base expands.
Investment in key sales staff: 1Spatial has made strategic investments in its sales team to support growth initiatives.
In the UK and Ireland, it appointed Nabil Lodey as the new managing director and a
new sales director for 1Streetworks. In the US, the company has hired a new director
of professional services and established a business development team focused on the
NG9-1-1 market. We expect this investment to support faster growth and margin expansion
from FY27 onwards. Resources will also be focused on more resilient market sectors
such as utilities, transport and public safety in the near term.
Growing recurring revenue base: Recurring revenues grew by 14.5% in FY25 and accounted for 62% of total revenues, up
from 45% in FY22, and management is confident of delivering further growth in recurring
software revenues in FY26. As this stronger foundation of recurring revenues offsets
more costs, incremental revenues will start to drop more strongly through to profits
and cash flows.
| Exhibit 1: Long-term improvement in revenue mix |
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| Source: Company data, Edison Group |
More benign market conditions: Global economic conditions remain difficult, but FY25 exceptional turbulence, with
elections in the UK and US, the latter of which has been followed by a significant
focus on government spend with the DOGE initiative.
Estimates and changes
Our estimate changes are detailed in Exhibit 2.
Forecasts moderated but still expect a pick-up in growth in FY26
Despite reducing our FY26 estimate by 7%, we still anticipate growth to pick up to
8% from 3% in FY26. Management is anticipating growth across all its geographies in
its Enterprise business, while it is also seeing signs of recovery in the US market.
Service revenue should expand again with commencement of the large Belgian contract,
albeit at a modest margin. As a result we expect gross margin to remain relatively
flat, with EBITDA margins also remaining flat at 17% with gross profit improvements
offset by the full-year impact of investments in the business development team, which
should start to yield returns progressively. We expect capitalised R&D costs to continue
to moderate (FY24 £5.3m, FY25 £4.8m, FY26 £4.7m). Our increased year-end net debt
forecast of £1.5m reflects the reduced profitability and higher interest payments.
With a £5.5m revolving credit facility we believe that the company has ample headroom
to execute its growth plan.
Our FY27 estimates are new and essentially reflect consistent growth across both recurring
software and services on a flat cost base. This drives an expansion in margins and
a return to positive cash generation. We also see scope for costs to be reduced.
We believe that these estimates are set at a cautious level and better-than-forecast
software sales could generate material earnings upside. We estimate that each incremental
£1m of software revenue in FY27 should add around 15% to our FY27 EPS.
| Exhibit 2: Estimate changes |
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| Source: Company data, Edison Group |
