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Mapping out a potentially promising stock

Almost everyone has seen or used Google Maps, but if you’re an Australian company or government department that requires higher resolution photos, there’s a small, listed company you turn to.

That company is Nearmap Limited (ASX: NEA), which uses its proprietary technology to quickly capture and process “PhotoMaps” and digital elevation data. The company’s patents are based on an aerial camera system called “HyperPods”, which allow large areas to be captured cheaply and quickly. Its photos capture several angles, are higher clarity, and are updated more frequently than free alternatives.

Useful features for clients across Australia

A Nearmap city-wide PhotoMap can be generated within a few days, compared to several months with alternative systems. Main Australian cities are captured on a regular monthly basis, ensuring they’re up to date, and the data is available online within hours. Users also have the ability to view a building or site from several different angles, as well as a terrain view which shows geographic features and undulations.

Another attractive feature of Nearmap’s technology is that users can make accurate estimations of measurements from within their web browser, without having to send out field staff. For companies like engineering and project management firms as well as resource and oil & gas companies operating in remote regions, this could be a huge benefit.

History and new subscription business model

After acquiring thousands of users of its photo mapping software, Nearmap took the drastic step of cutting off free access and instead installing subscription-only based access in November 2012. The results speak for themselves, with the cash rolling in. In the March quarter, cash receipts jumped 253% to $5.3 million, the second consecutive period of positive cash flows. Strong customer take-up of the new subscription model, as well as high renewal rates of over 98% from existing customers, were the main drivers. As of the end of the quarter, the company has $10.2 million in cash and no debt.

The company reported that it continues to see strong levels of enquiries from small-to-medium enterprises (SMEs) as well as government and commercial sectors. As Nearmap’s chief executive officer Simon Crowther said, “Significant growth opportunities remain for Nearmap, and we are planning to launch new subscription structures in the near term that will further broaden our user base.”

Plenty of possibilities

Nearmap currently offers two subscription models, PhotoMaps Standard and PhotoMaps Enterprise, which can cost from $6,000 for five users in one state, to $41,000 for 20 users using images Australia-wide. Mr Crowther has suggested that success for the company would be 30,000 to 50,000 subscribers, or around $30-$50 million in annual revenues. But that could substantially underestimate the potential of “single seat” subscriptions, as well as other products.

Nearmap has plans to offer “single seat” and pay-as-you-go (PAYG) subscriptions, potentially in June/July this year – according to Mr Crowther. These would be useful for businesses like property valuers, solar panel and air-conditioning installers, builders, real estate agencies and roofers, not to mention home buyers and sellers. This looks to be a huge market, and could add a significant number of subscribers and revenues.

With a fixed cost base, much of those revenues should drop straight through to the bottom line. Additional revenues could be achieved through the use of location-sensitive online advertising, such as a local bank offering loans to a consumer looking at house photos.

Growth targets — and the Google risk

Further growth could be achieved, as the company expands its coverage beyond capital cities and outlying regions. And it’s not just Australia that Nearmap could target. The product is scalable overseas, but for now Nearmap is taking a cautious approach.

The main threat of course is Google with its Maps product, or perhaps other giants like Nokia and Microsoft. They would obviously need to offer a more compelling product than Nearmap, which would require higher quality aerial photos and more frequent updates. It’s hard to see these big companies bothering, given they use their maps and aerial photos to supplement their existing offerings, rather than as a separate product. But it would be foolish to rule them out.

Foolish takeaway

With recurring revenues through its annual subscription fees and 98% of customers renewing, plus the ability to attract new customers through the roll out of other subscription models, Nearmap looks to have a good future ahead, and is likely to quickly outgrow its current $62 million market capmaking it definitely one for the watch list.

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