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

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.

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.

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.

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.

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.

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.

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.

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.