Nearmap shares rebound after short seller rebuff

Aerial mapping technology company Nearmap (ASX: NEA) is flying high today after announcing record annual contract value (ACV) growth in the USA, while hitting back at a critical report published last week by short seller J Capital.

When China-based J Capital attacked logistics software group WiseTech (ASX: WTC) in October 2019, the company founded by its CEO Richard White shed more than $2 billion in market value as investors headed for the exits.

Short sellers targeting ASX-listed companies appear to be losing their sheen. With exceptions such as Corporate Travel Management (ASX: CTD) and more recently Tyro Payments (ASX: TYR) whose customers were hit by outages, numerous victims of critical reports are bouncing back strongly.

WiseTech itself has been rising on the stock market, criticisms of SEEK's (ASX: SEK) Chinese business now appear to be but a blip in a steady upward trajectory, and agricultural landholder Rural Funds (ASX: RFF) has now surpassed its pre-short sell price level.

Nearmap looks to be in a similar boat for now. Following the 11 February report its shares dropped from $2.33 to $2.16 before entering a trading halt, but upon the recommencement of trading today its shares jumped by 8 per cent back to a similar price.

The Sydney-based company released its December results at the same time as a response to J Capital, rebuffing several claims including the allegation that "losses are widening, gross margins are going backwards, and competitors are crushing them".

Nearmap claims its pre-capitalisation gross margin - the company raised $72.1 million in September - has risen by nine percentage points to 77 per cent, while in the US it has jumped by 24 percentage points to 53 per cent.

"The precapitalised gross margin is now above 50 per cent meaning that Nearmap effectively generates US$2 of ACV for every US$1 spent on capture," the company said in its response.

The group expects to deliver ACV growth at the upper end of the $120 million to $128 million guidance range in FY21.

"Our 1H21 result represents an early validation of our decision to refine our go-to-market strategy and focus on our core growth verticals [insurance, government and roofing] in North America, which showed strong growth in 1H21 and where the market opportunity is significantly larger," chief executive officer and managing director Dr Rob Newman said.

"Our market leading ANZ business continues to grow and we see an opportunity to roll-out a similar go-to-market approach in ANZ to deliver deeper value in this market and further increase our leadership position.

"Our response as a company and the commitment of our people over the last twelve months have demonstrated the resilience of our business, as we have continued to execute in a challenging environment and deliver a service our customers have valued."

Chief financial officer Andy Watt highlighted a strong performance in the first half of FY21 across many benchmark metrics, reflecting the strength of the underlying business model.

"Following the decision to raise capital in September, we have maintained a disciplined approach to managing costs within our business and we have continued to drive returns from investments previously made," Watt said.

"This leaves Nearmap in a very strong position to selectively deploy capital into key business initiatives and accelerate our growth opportunities, driving increased returns across our ACV portfolio."

This executive sentiment is in stark contrast to last week's J Capital report, which alleged Nearmap was laying off sales staff and offering discounts in a panicked attempt to improve margins, knee-capping its efforts to grow.

"Nearmap turned up in the US in 2014 with a unique product but failed to monetise it, and now competitors have speeded past," J Capital reported.

"The company incurs twice the costs of US competitors to complete the same surveys and has a vanishingly small US market share after seven years of trying.

"Its analytic technology lags far behind the competition. Sales to insurers, about 41 per cent of the total, may be challenged in a potential patent dispute with key US competitor. Throwing money at the problem isn't helping.

To reach these conclusions, J Capital also claimed it spoke with five competitors, seven former employees, and 14 clients or prospective clients. Through those conversations it allegedly learned that Nearmap "has failed to succeed in any key sector in the US."

"Expect more losses and more hype about the prospects in the US when the company reports H1 FY 2021 on February 16," J Capital said.

Whether today's results and counter-claims are merely hype or not, investors are certainly encouraged by them. In a five-page report, Nearmap hit back at the report in detail, standing behind its US strategy and alleging J Capital misunderstood the business in areas ranging from technology to churn to its pricing model.

Nearmap claimed J Capital compared its technology with competitors' offerings based on old patents, misunderstanding how it delivers content "with confusion between imagery (pictures), roof geometry, change detection and property characteristics derived by AI".

J Capital alleged Nearmap was trying to lure in new US clients with discounted rates, ramping the price once the clients are on contract, representing a "short-sighted policy" that has been unable to capture government clients.

"The Government pricing model referred to in the report is outdated. In response to customer feedback about the appropriateness of Nearmap's standard data-based pricing model for government use cases, Nearmap changed its government pricing model in late 2017," the company responded.

"Nearmap's subscription model allows capture costs to be shared across many customers allowing more frequent updates at a lower price to all customer including government."

With the pricing change and offering more products to government customers, Nearmap claims it has recorded a compound annual growth rate of 66 per cent in ACV for government accounts over three years.

J Capital also alleged Nearmap had misrepresented its churn of customers, estimating the company had churned 28 per cent of its current clients since entering the North America market.

Nearmap noted J Capital's attempts to calculate its churn used a combined number of subscriptions lost over a four-year period between FY17 to FY20 relative to the number of subscriptions as at June 2020.

"This method of calculation is inaccurate and misrepresents churn," it said.

"Nearmap presents churn on an ACV basis to reflect the variable $ value of subscriptions. Churn is calculated on a rolling 12-month retrospective view, a methodology that is standard for most subscription businesses.

"As highlighted in today's 1H21 results, Nearmap's North American ACV churn at 31 December 2020 was 6.5 per cent. Government churn has been 20 per cent less than overall North American churn over the last three years."

Dr Newman's conclusion in the response was scathing.

"This report demonstrates a deep misunderstanding of our business and the industry in which we operate," he said.

"The report contains many inaccurate statements, makes unsubstantiated allegations and presents a misleading representation of our business.

"Our company has delivered a very strong result which clearly demonstrates the strength of our business and the high levels of engagement of the Nearmap team. All members of the board are resolutely committed to the company's long-term growth."

Business News Australia