1Spatial — Making GIS data useable for a variety of verticals

Continuing its transformational growth journey, 1Spatial generated solid results in H123 (see Exhibit 1). In what is the second year of management’s three-year growth plan, revenue was up double-digits over H122 (11% constant and in local currency), driven by £6.6m in recurring revenues (up 18% y-o-y) and £1.7m in term licence revenue (up 67% y-o-y). 1Spatial’s successful geographic expansion continued, with key regions UK/Ireland rising 26% (in constant currency terms) and the US growing 6% (constant currency), while Europe was up 2% (constant currency).

Total ARR, a key performance indicator marking 1Spatial’s ongoing transformation to a software-as-a-service (SaaS) business with a growing portion of recurring revenue, reached £15.2m, up 29% yo-y, with term licence ARR more than doubling year-on-year to £5.2m.

Gross margins fell about 110bp y-o-y to 49.5%, as inflationary pressures, employee retention efforts and global macroeconomic events affected costs. While 1Spatial was able to increase pricing somewhat, the timing of those increases will be felt more in H223. Adjusted EBITDA was lifted 10% y-o-y to £2.0m, with margins down slightly to 14.4%. 1Spatial reported EPS of 0.19p, up from a 0.18p loss in H122.

Free cash flow (FCF) improved to a £0.88m outflow from a £1.42m outflow in H122 due to increasing revenues, though offset by higher working capital requirements for recent large deals, increased investments in R&D and increased staffing costs. Net cash fell slightly to £2.3m from H122’s £2.8m due to the aforementioned factors. FCF and net cash for the remainder of the year depend on the swings in working capital and the cash impact of recently signed large deals.

As noted in our previous report, the US provides a great opportunity for 1Spatial to drive scalable growth, and is a key factor in its ‘land and expand’ strategy. Management has previously won contracts in several influential US states, including California and Michigan, for solutions such as 1Spatial’s Next Generation 911 Emergency Services system (NG 911).

1Spatial generated a steady stream of wins during H123 from new and existing customers across the US (see Exhibit 2), with the majority expected to provide substantial future recurring revenues. Notable wins included: a $1.4m expansion contract with California’s Department of Transportation (DOT) won via a partnership with Rizing, a five-year contract with the University of Maryland’s CATT labs worth an initial $0.6m, the first contracts with the States of New York (for various proof of concepts) and Arkansas, the eighth US state to choose the NG911 solution. Notably, 1Spatial also closed post-period deals with Massachusetts DOT for $0.4m as part of the Eastern Transportation Coalition (a partnership of 18 states and Washington DC, with a potential total value of up to $15m over eight years), and a first contract with the State of Indiana for proof-of-concept projects. These wins indicate that 1Spatial’s strategic plan in the US continues to be successful.

The UK also saw strong growth during H123. Contract wins included £0.9m over two years with High Speed 2 (HS2) to build a data validation gateway, with potential for further expansion, and a multi-year call-off contract with the Department for Environment, Food and Rural Affairs (DEFRA) that enables DEFRA and associates to license 1Integrate and procure data management implementation services through G-Cloud 12. Progress also continues on two major contracts signed last year (UK government and the National Underground Asset Register (NUAR)) with both expected to provide future growth opportunities.

Management also continues planning the launch of 1Spatial’s multi-tenancy SaaS-based solutions in H223, including NextGen 911 and Traffic Management plan, expected to provide significant future growth.

Management won several sizable contracts that provide excellent referenceability as well as long-term ARRs, including with HS2, a major European aerospace company, the State of New York and a framework contact with the Eastern Transportation Coalition. For instance, New York, California and Michigan are very influential among US states, and we believe those contract wins should boost the prospects of 1Spatial’s continued expansion in the US to other states, as evidenced by the recent win in Arkansas.

Furthermore, 1Spatial’s ‘smart partnerships’ continued to expand with large customers and partners, both providing deal flow and adding credibility to management’s growth strategy. As we discussed in a prior note, one pillar of 1Spatial’s growth strategy is to collaborate with select partners in bidding on large contracts where 1Spatial’s role is to be a data integrity provider. In management’s view, 1Spatial’s reputation as ‘best in breed’ continues to be why it is chosen to perform this key role. For instance, management recently signed a teaming agreement with CGI, one of the world’s largest independent IT and business consulting services firms, to be a strategic delivery provider on a five-year contract with the UK Home Office. 1Spatial also started working in partnership with ATOS, a global leader in digital transformation, and Rizing, a global SAP partner. Notably, the contract win with California DOT in May 2022 was won in conjunction with Rizing.

We believe the GIS industry is exciting and poised to grow rapidly. Every day, an explosion of data is generated, with billions of data sets from satellites, sensors, big data, mobile devices, the Internet of Things and connected vehicles. Management estimates that 80% of data sets have some sort of locational component, whether it be a vehicle’s position, the location of a city’s assets, the weather, the nearest tower to a cell phone, and identification of approved or unapproved individuals in a university or company warehouse. And the rate and amounts of GIS data generated and collected will only continue to increase over time; we believe market growth rates could reach 20%+ over the next decade.

Because large amounts of raw GIS data are being collected and generated every day, a significant opportunity lies in managing and organising that data to make it useable by companies, analysts and the general public. The ability to turn GIS data into something useful for applications and insights is where we believe value lies. This includes preparing data for useability by machine learning and artificial intelligence, for farmers and agricultural firms who want location data to improve crop yields and efficiencies, for governments that want up to date intelligence on developments across the globe (eg Ukraine war), etc. These expanding use cases require higher-quality GIS data, as customers want to be confident that what they get is accurate and free from errors, which is where 1Spatial’s proven ability to validate, rectify, correct and enhance GIS data becomes valuable.

Finally, the GIS industry is fragmented, made up of several hundred firms involved in different aspects of the industry with no two to three firms dominating the entire market. As such, it presents small and medium investors with numerous opportunities to gain GIS market exposure, including 1Spatial and others who can dominate their niche sectors.

Management reiterated that it remains confident in delivering FY23 results in line with expectations. Based on 1Spatial’s solid H123 results, we maintain our forecasts, although we make a small tweak to deferred compensation for post-period activity. This change does not affect earnings but it does slightly impact cash from operations. The company’s pipeline seems healthy with several potential deals from across the globe, and the two post-period-end deals for Massachusetts DOT ($0.4m with a potential contract value of $15m over eight years as part of the Eastern Transportation Coalition) and State of Indiana for proof-of-concept projects provide a head-start for H223. While 1Spatial continues building up layers of recurring revenues from contract wins, we do recognize that global macro events and inflationary pressures could have an impact on 1Spatial’s growth and margins. On the other hand, the repeatable nature of many of the deal wins indicates there is likely more to come and our estimates may prove to be conservative.

We continue to forecast £29m in FY23e revenues, up 7% from FY22, with EBITDA reaching £4.9m. However, we reduce our period-end net cash to £3.1m from £3.5m due to the aforementioned post-period activity. We also project the adjusted FCF (which excludes the deferred compensation) pattern to change from an outflow in H123 to an inflow in H223, leading to about £0.3m in FY23e adjusted FCF. FY24e should maintain the same trend, with sales up 8% to £31.2m and EBITDA of £5.7m.

At a price of 41.0p, 1Spatial trades at about 1.6x FY23e revenue, less than half of its software and data management peers at 3.6x (see Exhibit 3). 1Spatial trades at an 8.8x FY23e EV/EBITDA multiple, a 43% discount to its peers such as Hexagon and IQGeo (see Exhibit 4). Some of the multiple gap could reflect 1Spatial’s smaller size or lower FY23e projected growth (7% vs peers at 12%).

If 1Spatial continues growing its base of recurring revenues, generating significant contract wins in the UK and US, and keeps expanding in the US by adding scalable opportunities such as NextGen 911, we expect there could be a reduction in the valuation gap. However, closing the revenue multiple gap could take time, although our forecast for growth in FY24e (8% vs 9% consensus for peers) may bode well for 1Spatial’s efforts to reduce the disparity in growth.

Reaching an FY23e sector average price/revenue multiple of 3.6x would imply a share price of 97 pence, a 133% premium to the current price. If 1Spatial keeps developing its smart partnerships and/or adds more reference wins to its track record than we expect, then a future re-rating is possible.