(P.S. I’m not an I.T. person. But I’m here to review their financials!)
1Spatial PLC is a leading software and solutions companies trading under the brands 1Spatial and EnablesIT.
What it does is they manage to interpret data for clients. To do this, they partner up with some of the leading technology vendors including, Esri, Oracle, and SAP.
Looking at 1Spatial over a four-year period, the business looks great (meaning I like the financials). It is growing in tech status, but what is bothering investors is the falling cash balance.
So, what is going on at this technology firm?
To make sense of this, you need to break down their financial step-by-step.
1 Spatial Profit and Loss
You can see it is making good progress on its sales generation. Here’s the breakdown for every six months.
Clearly, the business is growing their client base, as revenue jumped 300-plus percent in four and a half years. But, the downside is the accumulative operating loss of £12.3m!
So, what is the cause? Well, it isn’t coming from faster trade receivables growth.
The culprit goes to higher admin costs.
1 Spatial admin costs accounted for between 58% and 82% of total revenue, which is really high. Let’s see why.
Employee costs too high
Here is 1 Spatial wage cost per worker: –
Given it is a small company, I include and exclude directors’ pay in two separate graphs to suss out if the directors were overpaid. That isn’t the case! But, 1 Spatial is paying their staff a high salary.
There is a reason.
Business Insider has made a list on how much each tech firms in the UK pay their workers. Take Facebook from that list. They pay their employees an average of £70k, which incl. free food, business travels, gym allowance, etc.
So, for 1Spatial to recruit talent, it must offer a similar level of pay, despite being a minnow.
Has the high salary helped 1 Spatial to generate extra revenue per worker?
Sadly, not! In fact, the company’s productivity has declined from £120k in 2012 to under £100k.
1 Spatial Balance Sheet
One standout number is the company’s cash balance. Given the year-in and year-out losses, the change in cash position makes an interesting observation.
The graph can be explained by the £17m equity fundraising in 2013 and £2m fundraising in 2016. That has helped to keep the cash afloat. Seeing the graph, investors must be wondering another financing is needed.
Did you know? – Since 2013, total wage bill comes to £42m. That means shareholders were funding 45% of 1Spatial employees’ salary!
Also, the shares outstanding (since 2013) rose from 348m to 760m, that is a sign of dilution as it limits the rise in share price.
When it comes to researching tech firms, investors should keep an eye out for “prepayments and accrued income” (on the asset side) and “deferred income + Accrued liabilities” (on the liability side).
Rising deferred income tells you a business is attracting more clients because they are paying for services upfront, like an annual subscription service. That trend signals a growing business. At the same time, 1 Spatial manages to keep accrued liabilities constant, which is good. That tells me they are keeping up payments with their suppliers.
A lesson here is when you see a subscription-based company with zero deferred income growth, then it got no business!
1 Spatial Cash Flow
Net cash generation has been poor when you look at the last five years, it has made £5.5m in cash losses! Also, the business requires annual capex of between £1.5m and £2m per year to grow revenue.
There are no dividend payments.
What others are saying?
ShareProphets has rated 1Spatial a buy up to 6 pence per share. They cite the departure of the old guard and the arrival of Andrew Roberts. Mr Roberts has a good track record, including being Chairman of supply chain software business Kewill and having led a turnaround of The Innovation Group to a £500 million sale in 2016.
1Spatial – Final Thoughts
1Spatial is a great company with growing revenues. The fundamentals are sound, and the growth in deferred income means a growing customer base!
But we must face reality (as shareholders) to say it hasn’t made a penny of profit! One reason is the high costs of hiring talented people.
At the moment, 1 Spatial trades on 4 pence per share, valuing it at £30m. For a fast growth techie, we shouldn’t write it off (just yet) because a quick £2m profit could see the shares skyrocket. (maybe up to 6 or 7 pence per share, which values it at £45m to £50m). Especially, if analysts are forecasting £3m profit the year after!
At the same time, it could raise further financings which would dilute shareholders value.
I give hope that the new management can turn the business around. Also, you need to remember each business have their own unique sets of challenges. Therefore, management may or may not have an answer to every puzzle.
Forecasting the share price by using probability
We don’t know what the future holds for 1Spatial, but you could put a probability on each event occurring. And here is my forecast:
Best-Case Scenario; – I give a 20% chance for 1 Spatial to produce a £2m operating profit, which would help the share price to rocket up to 6 pence.
Normal-Case Scenario; – I give a 30% probability for the company to be cash neutral meaning it makes enough to cover capex and acquisitions. That imply a fair valuation on today’s market value.
Worst-Case Scenario; – 50/50 odds for the firm to raise more cash, while it continues to make losses for shareholders. The amount of financing is unclear, but a share price of 3 pence or lower is a real outcome.
I like the company, but the shareholders won’t benefit much, as it is an employee focused business. Think of it like the Premier League football clubs, where the players are the money, which leaves the club with the losses!
Thanks for reading.
Do you agree or disagree with my assessment?
Will there be a turnaround?
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The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.
Finally, the writer does not own the company’s stock, unless stated otherwise.