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Why Nearmap Ltd shares surged despite a cashflow burn

The Nearmap Ltd (ASX: NEA) share price jumped 11% to $0.73 cents this morning as the market reacted to rapid growth posted by the company’s Australian and US divisions.

Australian annualised contract value (‘ACV’; a measure of how much revenue the company would earn if it had its customers for a full year) grew 27% to $43.3 million, and US ACV grew 100% to $8.5m.

This was a solid result and pleasingly both the US and Australian sales teams are running at close to 100% “Sales Team Contribution Ratio”, which means that they are basically generating enough new sales to cover the direct costs of sales and marketing – a plus for the unprofitable Nearmap.

Additionally, the current level of US ACV is now expected to cover the US costs of image capturing in Financial Year 2018. Combine those two pieces of good news with the profitable Australian segment, and that could have indicated that Nearmap is close to breaking even.

However, cash flows suggest otherwise. Nearmap burned nearly $8 million dollars in the half, due both to losses in the USA and investment in new software products and technology.

Additionally, even though the sales teams generated enough ACV to cover the capture costs, the company still wears the costs up-front, before it starts generating revenue from new customers.

This, combined with research and development expense, could explain the cash flow. If so, cash flows should improve over the next 6 months or so. However, if Nearmap continues to spend aggressively, the company really only has 12 to 18 months of cash remaining at current burn rates.

Given the rate of growth, I would expect that Nearmap could break even over the next year or so if it chose to, but the risk of the company raising more cash is something investors should bear in mind. Even so Nearmap appears to be making significant progress, and I continue to hold my shares.

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Motley Fool contributor Sean O'Neill owns shares of Nearmap Ltd. The Motley Fool Australia owns shares of and has recommended Nearmap Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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