Hall of Shame
Nearmap Ltd. (NEA AU)
Nearmap Ltd is an Australia-based location intelligence company. The principal activity of the Company is online aerial photomapping. Its segments include Australia & New Zealand (ANZ), which is responsible for sales and marketing in Australia and New Zealand. North America (NA) is responsible for sales and marketing in the United States and Canada. It uses its camera systems and processing software, Nearmap, captures wide-scale urban areas in Australia, New Zealand, Canada and the United States (US) multiple times each year. Its products include Nearmap Vertical, Nearmap Oblique, Nearmap 3D and Nearmap on OpenSolar. Nearmap Vertical is its orthogonal imagery base layer. Nearmap 3D is an on-demand portal for immersive, photorealistic exploration of metro areas across the Australia. Oblique views show a gallery of individual images from four directional perspectives. Its subsidiaries include Nearmap Australia Pty Ltd, Nearmap US, Inc and Nearmap Remote Sensing US, Inc.
The Company listed on the Australian Stock Exchange (ASX) in December 2000; raising A$10M in its IPO. Additional share offerings between 2006 and 2020 raised A$176.12M; (Feb.2006: A$2.46M, Nov.2016: A$20.00M, Sep.2018: A$70.00M, Nov.2020: A$83.66M).
February 10, 2021 J-Capital Research issued a report "Nearmap - Afraid to Admit Failure". J-Capital believed that Nearmap was failing in its attempt to gain a foothold in the US market despite the company reporting strong growth in the US market. It believed that the Company was using accounting tricks to hide the fact of the failure. J-Capital was of the opinion that Nearmap's actual U.S. revenue growth was less than 50% of what it reported. The main points that J-Capital presented to back this up were:
- The company incurred twice the costs of the leading U.S. competitor to complete the same surveys and had a vanishingly small U.S. market share after seven years of trying,
- Nearmap's analytic technology lagged far behind the competition. The technology deficiencies in both image capture and AI indicated why the Nearmap business would struggle to gain material market share in the U.S. Nearmap's competitor Eagleview’s camera system captures twice the ground area of Nearmap’s on the same flight. As a result, Nearmap’s costs for its aerial images are at least twice those of Eagleview.
- Sales to insurers, about 41% of the total, may be challenged in a potential patent dispute with key U.S. competitor,
- Nearmap was trying to lure in new U.S. clients with discounted rates, ramping the price once the clients were on contract,
- Nearmap appeared to be conserving cash at the expense of revenue. J-Capital's research showed that Nearmap was flying only densely populated areas to save money on the cost of surveys.
- Critical clients were dropping the service. J-Capital estimated Nearmap had churned 28% of its clients since entering the North America market. The attrition problem was worst in the critical government sector.
- Nearmap laid off 15% of its U.S. sales force in FY2020. This was the fourth major reshuffle of management, sales structure, and strategy since entering the U.S. market seven years previously.
- J-Capital identified aggressive revenue recognition of at least $11.7M in FY2020; 12% of total revenue. Nearmap capitalized capture costs years ago, but it only began to exclude total capture costs from operating cash flows in FY 2019. J-Capital believed this was done to dress up poor operating cash flows. If capture costs had been counted as an operating cash flow expense, then OCF would have been sharply negative—minus $12M instead of the positive $12M reported. That is a $24M swing.
- J-Capital believed Nearmap was bringing forward revenue. Contract liabilities; the unearned payments that were received in advance of revenue recognition, declined in proportion to reported revenue for both FY2020 and FY 2019. The way to do this would be to sneak a bit of unearned revenue into current revenue by taking an over-generous view of services provided. Contract liabilities as a percentage of revenue declined to 51.3% in 2020 from 63.3% in 2018. Had Nearmap maintained contract liabilities at the 2018 level, reported revenue would have been $11.7M lower, lower by 12% of reported revenue, in 2020. EBIDTA would have gone from $9M to -$2.7M. Contract liabilities as a percentage of revenue should be the same or higher than previous periods if the company was growing.
- Nearmap spent nearly $2 for every dollar of revenue produced in North America and faced rising losses. FY 2020 revenue for North America was $24.4M, while segment EBIT was negative $21M and total costs were $45.5. Therefore, every $1 of revenue costs $1.86 (45.5/24.4=1.86).
- Nearmap has consistently promoted its North American strategy as a winner. Meanwhile, the former chairman is selling shares; half of his shareholding over the last 12 months, netting more than $40M. His ownership in the company fell from 10.75% at the end of 2019 to 4.79% February 2021. J-Capital believed he lacked faith in the current strategy of the company.
J-Capital was of the opinion that the valuation and bull case for Nearmap were based on Nearmap’s assurance that it could replicate its Australian success in the much-larger U.S. market. J-Capital added that the reality was that losses were widening, gross margins were going backwards, and competitors were crushing them. J-Capital spoke with five competitors, seven former employees, and 17 clients or prospective clients and learned that Nearmap had failed to succeed in any key sector in the U.S. It expected more losses and more hype about the prospects in the U.S. when the company reported H1 FY 2021 on February 16, 2021.
February 15, 2021 Nearmap issued a response to the J-Capital report saying it rejected the report and its response was only focusing on addressing the Report’s key factual misstatements / false claims.
February 15, 2021 J-Capital issued a rebuttal to Nearmap's response. It stated that Nearmap’s response to its report avoided addressing the key issues:
- Nearmap did not dispute that the Eagleview camera system was twice as efficient.
- No attempt was made to demonstrate market-share improvement in the U.S.
- Then the Company obfuscated pricing strategy with obtuse language that did not refute any of J-Capital's statements.
- The company did not address allegations of aggressive revenue recognition and end-of period upselling with an auto renew that inflates sales but loses clients.
- Sales structure problems were overlooked
- Nearmap’s roof-measurement business had quality and legal problems not addressed in the reply report.
J-Capital concluded saying it continued to believe that Nearmap could not compete in North America. It also believed that the company was losing share in Australia and New Zealand.
May 5, 2021 Eagleview started legal action in the US District Court in Utah, alleging Nearmap had infringed its patents relating to aerial roof reports – a lucrative market in the US.
May 6, 2021 J-Capital issued a brief report "Nearmap: Can you trust management?". It expected EagleView to easily defeat Nearmap in court. J-Capital believed that should Nearmap lose they would be shut out of the US$120M roof-measurement market and segments of the government sector. That without those sectors, Nearmap would struggle ever to make a profit in the U.S. It believed that Nearmap failed to disclose its patent-infringement risk. J-Capital said that its interviews suggested that Nearmap was aware of the risk of an EagleView patent-infringement action as early as 2019.
J-Capital: Nearmap - Afraid to Admit Failure, 10 Feb 2021
Australian Financial Review: Short seller J Capital slams Nearmap’s US business, 11 Feb 2021
Nearmap: Response to Short Seller Report 15 Feb 2021
J-Capital: Nearmap: Supersize Me, 15 Feb 2021
Australian Financial Review: The long and short of Nearmap, 16 Feb 2021
J-Capital: Nearmap - Can you trust management?, 6 May 2021
Sydney Morning Herald: US rival sues Nearmap for alleged patent Infringment, 6 May 2021
Nearmap: Annual Report, YE Jun.2020
Nearmap: Annual Report, YE Jun.2019
Nearmap: Annual Report, YE Jun.2018