*Please note this is not a recommendation to take any investment action. Please perform your own due diligence before making any investment decisions.
We first became familiar with exactEarth when we were researching COM DEV International (CDV) as an addition to the model growth portfolio. The potential from a spin off of exactEarth out of CDV was one of the reasons we thought COM DEV looked particularly interesting. Now that a prospectus has been filed, we can take a closer look at this company. To get a more detailed look into exctEarth, we encourage readers to dive into the prospectus on Sedar.
Established in 2009, exactEarth is in the business of providing maritime vessel and ship-tracking data through satellite-AIS (automatic identification system). This service can be applied to vessel management, border security, trade monitoring and route analysis. The company largely charges through subscription based services, which make up 80% of revenues. ExactEarth has over 100 subscription data customers in both government and commercial institutions. Some notable government customers are the Canadian Space Agency, Canadian Department of Defense and the US Coast Guard. COM DEV currently owns 73% of exactEarth while Hisdesat owns 27%.
exactEarth expects the AIS market to have fairly strong growth of 14% annually out to 2024, and see a $163 million market. While this market size does not sound overly exciting, there is an interesting note on extending this technology into other markets such as the machine-to-machine market or the ‘Internet of Things’, but this really sounds more like an ‘idea’ than a business to us at this point. In general, S-AIS appears to offer better coverage compared to terrestrial AIS and while its primary use has been for collision avoidance, it seems a lot more uses are being discovered for this technology.
Looking at the competitive advantages here is what we found to be the most worthy of attention:
- Patents that have allowed the development of a technique to track small vessels
- Barriers to entry – Satellite systems are not cheap and they require a lot of expertise as does navigating the regulatory framework. These are areas COM DEV was already familiar with and this knowledge now exists in exactEarth.
Turning to the growth potential at exactEarth, it seems that the company is pretty confident that after the recent partnership with Harris, they will be the market leader in S-AIS for maritime data. As the service gains traction, exactEarth also expects to gain market share in the global maritime information market, which is expected to be a $2.1 billion market (including S-AIS). The company also appears to be interested in processing the loads of data that they are tracking and turning it into useable (and saleable) information. As mentioned earlier, the Internet of Things market could also be a big growth avenue for the company. Finally, exactEarth notes willingness and a list of targets they have that could be purchased in the short to medium-term. We think in the short to medium term, the most interesting potential would be the company’s ability to gain large government contracts as each contract could involve fairly large recurring revenue numbers.
Looking at the 2014 numbers in the preliminary prospectus, the company has been steadily growing gross margins from 22.7% in 2012 to 51.4% in 2014 and the first six months of 2015 show gross margins of 54.8% compared to 51.3% over the same period in the previous year. SG&A is a big expense currently at 67% of gross profits and depreciation is pretty high but the company did post positive adjusted EBITDA in 2014 of $1.8 million. The main things we feel are worth pointing out in the balance sheet would be intangible assets that make up ~21% of total assets and a debt to equity ratio of 1.64 as of May 1, 2015. The IPO should take care of the high leverage number as the purpose of the proceeds from the IPO are to repay ~$44MM in loans from CDV and Hisdesat. Looking forward, exactEarth is targeting 30% annualized revenue growth and 15% EBITDA growth over the ‘medium-term’. The three largest customers made up 60% of revenues at exactEarth in 2014.
A lot of the risk factors noted by exactEarth revolve around the fact that satellites are complicated and cost a lot of money. The other risk worth noting revolves around the Harris agreement and that a large proportion of AIS revenues will be paid to Harris along with the potential of contract disputes or disagreements down the road. While we have little reason to think either of these issues would occur, a lot of things could change once when the money starts to come in. Finally, there is a large degree of regulatory risk involved in this business.
Overall, the exactEarth IPO looks interesting but a lot obviously depends on pricing and from what we can tell, this will be a pricey one. We think the current market is still on the small side for the company and it will be up to them to prove that they can find new markets and gain market share from competitors. An interesting way to gain exposure to this could simply be through a position in COM DEV, who we imagine will keep some sort of equity interest in the company. The balance sheet for CDV will also be improved after the repayment of loans to exactEarth. Otherwise, it looks like the growth potential is there, but this might be a classic ‘show-me’ stock where investors are best to wait for signs that there is interest in the service through contract signings. Members are encouraged to read on after logging in for some thoughts on the pricing of exactEarth.