Shares in $170 million aerial mapping business Nearmap Ltd (ASX: NEA) nosedived 15% today after releasing its full-year results to the market. Shares have been sensitive to company performance in recent months and it's not unusual to witness a double-digit rise or fall.
Here's the story behind today's decline:
- Revenues rose 20% to $31 million
- Losses after tax widened 800% to $7.1 million (2015: loss of $0.8 million)
- Cash outflows of $5 million for the year
- Cash at bank of $12 million
- Strong growth in customer numbers and revenues both in Australia and US
- US revenue growth accelerated from the first half of the year
Disappointed investors
It seems the market expected more from Nearmap, with its US expansion costing a mint and delivering minimal tangible returns so far. However, a look at this chart suggests shareholders that sold today might have leapt before they looked:
As you can see, US operations are already ahead of Australian operations by their third year. Additionally, Nearmap believes the US market is approximately 10 times the size of the Australian one, with its current image coverage (just over half the population) reaching more than 8x the number of households and people, as well as 14x the number of businesses.
Nearmap should also benefit from significant operating leverage, because the costs of capturing the population remain relatively fixed, so each new customer to its platform can be added for a very low cost. Importantly, Research & Development ("R&D") expenditure as a percentage of revenue also declined (because revenues grew), despite an increase in total R&D expenses.
So is it a buy?
The nature of Nearmap's business means that it has to spend heavily on development up front – capturing images, marketing, and building software capabilities – which it then needs to license to customers. Buyers today are implicitly stating that they think the company can continue to grow sales enough to justify and exceed its current cash outflows.
Progress in both the US and Australia is encouraging and the addition of new cameras, software, and patents to the portfolio should help the competitiveness of Nearmap's offering. However, it's an open question as to whether Nearmap will have the funds to see it through to profitability, or if it will need to seek additional funds.
So far management has a good track record, and initial sales in the US are encouraging. I already have enough Nearmap shares, but if I didn't I would consider buying more, given that the US business has advanced, yet the share price is now below what I initially paid.
