Author's Note: This article discusses a microcap stock. Please be advised of the risks associated with microcap stocks. The text of the interview is an abridged transcription of a conversation between Lazarus Investment Partners LLLP and Intermap Technologies Corp. Intermap had no input into the selection of the title of this article nor into the commentary and analysis that precedes the interview. Lazarus is a shareholder of Intermap. Lazarus received no compensation for this article.
Introduction. Intermap Technologies (OTC:ITMSF) (TSX: IMP.TO) is one of the newer investments in our fund. In 2007 the stock traded at $10.50 a share. Today shares trade around $0.30 and the company is way off the radar screens of most investors. When we first started looking at the company we couldn't help but wonder why its shares were priced more than 95% below prior levels and whether it might be able to recapture some of its past glory. (To be fair, the company has more shares outstanding today than it did in 2007, but we are still talking about a market cap that was once something like 14x what it is today.)
What they do. Intermap provides geospatial solutions with particular strength in 3-D terrain tools that help companies, organizations, and governments make better terrain-based decisions. Think, for example, of a telecom company that is planning where to put its towers, or an insurance company pricing policies in a flood zone, or a disaster-management agency developing a fire containment strategy. All need sophisticated mapping technologies with industry-specific tools, far beyond anything offered by Google Maps. They need to study everything from the slope of the terrain to area demographics so they can plan their business, projects, and budgets accordingly.
Intermap takes data from a variety of sources, such as satellite imagery, population databases, and, very importantly, data it gathers by flying radar-equipped planes, and puts it all together into a suite of software solutions and tools. Lots of companies offer mapping data but few have the expertise and technology that Intermap has to convert the data into software that customers can use to solve problems. It is this ability to turn data into information that differentiates Intermap from its competitors. It's not very often that you hear a company say that it has limited competition, as Intermap's CEO states in the below interview.
The turnaround. Intermap was founded in the late 1990s, but was reborn when the current management team joined in 2011 to turn the business around. Intermap spent $150 million developing its technology yet has only about $30 million in trailing revenues and about the same amount in market cap to show for it. Todd Oseth, the CEO, and Rich Mohr, the CFO, are very nuts-and-bolts kind of guys focused on monetizing the company's technology assets. It has taken some time, but they were able to turn a company with a history of loss making into one that has six consecutive EBITDA positive quarters.
Underappreciated upside. One key thing that we don't see priced into the stock is the pipeline of opportunities for Intermap. On a trailing basis Intermap is rather cheap, at 1x sales compared to 5.4x for DigitalGlobe (NYSE: DGI). DigitalGlobe also commands a rich EBITDA multiple of 15.6x compared to 6.5x for Intermap. But investors who only consider historical financial results are missing the boat, in our view. Intermap has over $500 million of what they call "identified pipeline opportunities." The number is so large that if we didn't see it in their own corporate presentation (page 20) our lawyers wouldn't let us put it in writing. Ever skeptical of companies who talk about huge pipelines but have modest sales figures, we asked Todd what this number means, and you can read his response below.
Critical to our own decision to invest in Intermap is that the company has specific opportunities that could be game changing over the next 12 months. The company expects to hear back on a number of very significant contract bids in 2014, ranging from $10 million to $200 million in size. Intermap's sales are heavily weighted to software and services, so we are looking at high margins, including 90% for software and data rights. Moreover, this is one of the few companies we've heard say, as you'll read, that the products they offer are so unique that customers aren't really that price sensitive.
Key investment risks. None of this, however, means that Intermap is a sure thing. Alongside Intermap's uniquely attractive qualities come some unique challenges. Towards the top of the list is the challenge of selling to bureaucratic governments in certain parts of the world. Intermap is truly a global company with offices in the U.S., Canada, the Czech Republic, Indonesia, and Malaysia. The Jakarta, Indonesia office, for example, has 91 of the company's 196 employees. Intermap sees a burgeoning opportunity for its solutions in Southeast Asia. There's incredible demand and very few competitors, yet a labyrinthine contracting process and a restrained ability to fund everything the governments want to buy.
Delays are a regular experience for Intermap. As encouraging as it is to hear how they don't often lose on RFPs, the RFPs frequently get delayed. Further, the company can see customers dragging on payments for RFPs Intermap has already won. To address these issues, Intermap works with customers to help get contracts funded by third parties. In addition, they've shifted their contracting terms to emphasize upfront funding which helps mitigate payment risk.
Another challenge for the company is that it has a lumpy sales profile. This doesn't bother us but Wall Street loves predictability and it's impossible to responsibly model a company that may or may not win one or more $200 million contracts next year. Even the smaller, single-digit millions customers come and go, and for a company with just under $30 million in trailing sales, those really move the needle. There is also a sizeable warrant position to be aware of, although most of these warrants expire in April 2014 and are well out of the money.
Acquisition candidate. Long term, we see how recurring revenue can be a substantial portion of the company's top line but for the meanwhile we see contract wins and their big first-year payments as the bigger driver of revenues. This is one reason we think Intermap won't stay public forever as it would get better treatment in private hands. The other reason is because the company's technology is so differentiated that we see a larger competitor wanting to add it to their lineup. The industry today is full of terrain data companies. As data costs continue to fall, the industry will scramble to offer the technology and tools that are Intermap's secret sauce.
Summary. In a nutshell, if you'll forgive the use of the threadbare Gretzky quote: investing, like hockey, is about seeing where the puck is going to be, not where it has been. Intermap is a small company trading in Toronto with financials that don't show much historical top line growth. It is in these unlikely situations where we sometime find our best investments. But rather than look behind us and assume that the future has to be exactly the same as the past, we choose to look ahead and note the following:
- The turnaround is already showing green shoots with six consecutive EBITDA positive quarters
- The market cap of $30 million is just a fraction of the $150 million the company invested to develop its technology assets
- There is a pipeline of $500+ million of vetted opportunities
- There are several potentially game changing contracts on which the company expects to hear back over the next twelve months
- There is limited competition in the contracts
- Customers are not particularly price sensitive
- Management sees a long-term opportunity to reach $100's of millions of revenue
- Margins are extraordinarily high, with key divisions around 90% and others at 60%
- A buyout of the company seems likely since a competitor should want Intermap's technologies
We are certainly mindful of the risks to our investment in Intermap, but, all things considered, have come to the conclusion that the potential upside here far outweighs the downside risk.
CEO Interview. Because we are an institutional investor with a significant position in Intermap, we are often asked to explain our interest and highlight developments at the company. Above are some of our thoughts, and we are pleased to add a transcript of our conversation last week with Todd Oseth, Intermap's CEO so you can hear things from his perspective. A big thank you to Intermap management for taking our questions.
You joined Intermap in 2011 to turn the company around. What was it about the company that caught your interest?
Todd: One of the first things that I get attracted to when turning around a company is a large asset base. Intermap had spent a lot of money acquiring much of the world in three dimensions. There's a reason someone decided to develop this asset. It just may take some new innovation to bring it to market.
It may not have been the original founders of the company who figured out exactly how it was going to get used, but when you spend $150 million and continue to get investors' money, you know there's something there. There's fundamentally something unique to what's being delivered. The question becomes, how do you monetize it? What can be changed in the go to market or the actual product or solution delivery?
Intermap is no different than other companies that have needed help. I've turned around network companies, software companies, computing companies--that if they've spent a lot of money and missed the market, there typically is another opportunity in an ancillary market that's large, many times much larger than original projections made by the founders.
You said they spent $150 million developing the technology. Where did that money go? And is there anything unique about the technology?
Todd: Fundamentally, this is a radar technology that actually delivers 3-D terrain information. Radar inherently has the ability to see through clouds and go through weather. That gives this sensor type an advantage over anything that's in the optical space, like satellites. Satellites require cloud-free acquisition; the same thing with aero-photo to acquire data of any value.
By using radar, we have a guarantee of how long it's going take to acquire a specific area. We can tell you, for example, it's going to be 30 days because we know how many kilometers we've got to fly. We have certainty of accomplishing the task with our technology. This certainty is not possible with other technologies.
In addition, our data acquisition technology is as accurate as what's running in the F-35's today. This is our latest and greatest advanced fighter for the U.S. We take our data; overlay it with imagery from other vendors to determine where that picture is on the earth. The current investment has over 12 million kilometers of collected data. That is the entire U.S. and Western Europe combined.
Next comes the new innovation of what do you do with the data? When you start to think about applications, they need a contiguous database for processing. Most of the countries in Europe have different formats for their geospatial data. France is different than Germany which is different than Italy. The challenge becomes, if you're doing a large-scale flood model, you need that contiguous database that doesn't care about whether you're in France or Germany because you need consistent data across the area of evaluation.
Today there's no one else that has a contiguous database for all of Western Europe. No one, not even the U.S. government, has it for the United States. Intermap does. So the database is a unique asset that is now being monetized through the development of software applications.
Can you give me an example of who uses Intermap's solutions?
One of the best solutions is the prediction of catastrophic risks. Any application that predicts where good water or bad water needs to be routed is a prime candidate for our solutions. Next, fire; fire is highly dependent upon slope in order to determine the directions it will travel.
What other data sources do you need?
We combine hundreds of different data sources like demographics, property ownership, land classifications, etc. and then mine them to deliver a specific answer. In many cases you want to know who might be harmed in this type of catastrophe. What kind of buildings are in this location and what are they worth? How many people and/or how much inventory needs to be moved? We may need to know industry-specific attributes that are geospatially referenced like locations for antennas, billboards, roads, etc.
Once you have aggregated all of these different types of data into a single data source, we perform unique analytics to deliver a specific answer that is of value to our customers. It's all about unique data, with unique algorithms and computed with a proprietary process to achieve the greatest value for our customers. Our customers do not have the resources or the expertise for this analysis themselves. They want to spend time doing whatever their company does well. Our job is to provide them the best tools so they can make the best decisions in their industry.
Your corporate presentation says that you see the industry at an inflection point now. What's going on?
Todd: Over the next three years, some 3,000 satellites will be in outer space all acquiring data. Three-thousand! What that means is there will be a lot of imagery collected and they are going to be fighting to sell their pixels. The price of just data, just imagery, is going to start dropping like a rock because there are so many people with satellite imagery. Most of them do not have the means to convert this data into meaningful information because they have not taken on the solutions approach.
Companies are going to have to help people understand how to work with and manipulate all this geospatial data. That's the business we are in and where we have very unique tools and solutions for customers to make practical use of all the data out there.
We sell solution software, not data. We love that there are more and more people that will be providing data so that we can reduce our costs for each solution. Our software utilizes our data and combines it with satellite data, LiDAR--laser data--to create the best data set available for the money. It then combines it with demographic information, telco information and puts it all together into a solution that delivers what my microwave back haul network needs to look like for the city of San Francisco, for instance.
I've heard you talk about the cost savings your solutions can bring to customers.
Todd: In each industry it varies. But in industries that use surveying it can save large amounts of dollars. For instance, for a telco application to determine if two towers can see each other they survey two locations. They would typically deploy 4-5 people and evaluate if the two towers have a clear line of site. In today's labor rates, it takes about $1,100 to evaluate one link or two towers, two sets of people climbing to the top of each tower with a laser and sensor.
With our application it will take about 20 seconds to do the computation, and you never leave the office. That saves, maybe, $1,000. I mean, it's a huge savings for the companies that have to put together the backhaul network since they no longer have to send out crews to do the survey. A large city may have 60,000 to 70,000 towers to evaluate.
That's a $60 million-plus bill for a telco in order to get those measurements manually for each city?
Todd: We're charging a few pennies but otherwise it would cost them millions of dollars. You've got companies like Verizon, T-Mobile, Vodaphone, and DragonWave that need these networks.
What does it mean when you reference, as you do in your corporate presentation, $500+ million of identified pipeline opportunities?
Todd: Pipeline refers to our identified opportunities. The identification follows a fairly rigid qualification process that says: there is money, there is a need, there is a timeline for them to want to purchase. If it satisfies those hurdles, we can count it in our overall pipeline.
We follow the good old Salesforce.com analysis all the way through and then we track the velocity of each of those customers that are moving through our pipeline.
Within that pipeline, are there any contracts or RFPs [requests for proposals] in which you're well along the way? Are there any which you expect to hear back on over the next 12 months or so?
Todd: Yes, there are a number of very large contracts that utilize our entire suite of software, our data acquisition technologies, as well as our ability to aggregate other company's data, of which we should hear back over the next twelve months.
What's the average or typical size of those contracts? Are they one-time awards or recurring revenue opportunities?
Todd: We call these larger deals that are requiring a spatial data infrastructure an Orion project. These projects in general can run from a few hundred thousand dollars to tens of millions. The large contracts I referenced just before are all a minimum of $10 million in size, and some have the possibility to be much, much larger. In a $10 million Orion project it would break out into maybe $6 million of data acquisition, $3 million worth of software, $1 million worth of professional services. Data acquisition is when customers pay us to source the data they need, often using our planes and radar equipment but also third party data.
The software would have roughly 20% yearly maintenance, just like all the rest of the software in the industry. Then the follow-on data acquisitions have to do with updating the database. The database contains elevation and imagery. While the elevation does not change much year to year, they're going to want to have imagery updated at least once a year, and sometimes twice a year, depending upon the customer and the software application requirements.
If you were actually in the process of putting in a spatial data infrastructure for an entire country, take all those ratios and apply it to a $200 million Orion project. You could end up having software of $30 million, professional services of $10 million and recurring maintenance. Lastly, once the infrastructure is in place there are custom applications to be developed and the maintenance that goes along with the software. Every government needs an Orion implementation and most large companies need one too.
Here is a problem today in Thailand. Two years ago, massive floods came rolling in. The semiconductor industry got destroyed because most of the packaging for the world was done in facilities outside of Bangkok. Bangkok floods, all of those facilities were flooded, the whole industry tanks. Now the industry wants to come back. Bangkok would love to believe that they would just come back to Bangkok. But industry has choices. They're not going to go into Bangkok knowing it's going to flood again. So the first question they ask is, "What are you doing to make sure that this property does not flood?"
At the same time, Vietnam is putting their hands in the air saying, "Hey, we've got some facilities over here that we'll make dirt cheap for you if you bring it from Thailand to Vietnam." At the same time, Indonesia is putting their hands up and doing the exact same thing. All of these guys need infrastructure so that they can be successful in luring these manufacturing customers. And the only way you're going to get those manufacturing companies is if they can buy insurance for their facilities because they're not going to go into a place, no matter how cheap it is, if they cannot insure the people, and that the property and the product that is moving through that facility is protected.
What's the competitive situation for those contracts? Do they have dozens of competitors submitting on those RFPs or is it a much tighter landscape?
Todd: It all has to do with the overall specification. Most of the industry, remember, just delivers data, not software solutions. So as long as the RFP is based on providing an answer or a software infrastructure, there really are not many competitors, other than just the local IT groups that believe they understand geospatial data.
While there is competition, we use a consultative selling technique that focuses on the result the customer needs. By focusing on the result, it's mostly the software applications and infrastructure that provides the answer and if there is data acquisition required it is a bonus because we're able to deliver them a level of resolution that's just not available from other vendors.
Can you quantify it? Could you say on the average RFP, we're one of three or one of four or one of twenty?
Todd: Well, some of them we've actually already won and are awaiting government funding. They know they need to put the infrastructure together. In some cases we help in finding funding sources
So what that means, we go to the World Bank or other national banks and ask if there are funding sources available for that country for project financing. This approach is normal for our kind of business in third world countries, in Southeast Asia and elsewhere, that we typically have to get some large financial institution involved in order to help the country pay for the project.
How important is pricing when it comes to winning an RFP?
Todd: Not that important. The solution that you deliver is more important than the actual pricing. Governments make decisions on what they need, not on the lowest price. Reducing price only helps in a few cases.
Looking beyond next year, what's the vision for where the company can go over the very long term?
Todd: Fundamentally, we identify markets that will allow this company to grow to hundreds of millions of dollars by providing software solutions that use geospatial data. The opportunity is very vast. Water is the most important resource we have and managing it has only just begun. Water is worth billions of dollars.
What's ahead in the product pipeline?
Todd: RiskPro and GeoPro have not come out in the industry yet as standalone tools. They have been focused on specific geographies. Early in 2014 we will make them available worldwide. We are getting close to release.
Where does the top line have to be for the company to break even?
Todd: It's a tough question but between $20 and $30 million. That's in the ballpark of what we did in 2012. It all depends on how many engagements we win to map new terrain. We are optimistic about our growth and strategy. Changing the way a company does business takes time, but we have tapped into a unique approach that can be used worldwide.
This approach helps one of our partners with an agriculture application. Our data combined with their data is helping determine whether the crops are healthy, whether they're overwatered, or over-nitrogenated. Lots of new types of information that all has to be merged together in order to help farmers increase yield 1%. A 1% yield increase is worth billions of commodity dollars. This is huge money that we can actually do by merging and fusing all of this data together and writing the specific applications so that those persons that predict future commodity pricing have the best prediction possible.
What are some of your greatest frustrations as CEO?
Todd: Many of the large projects we have are government-based and those governments do not necessarily have funds available even if they have severe need for our products. Emerging countries are difficult to depend on so we have developed our software products to start to even out our revenue.
Until we get a major part of our revenue to be of the predictable type--software applications--we can have huge ups and downs in our revenues on a quarterly basis. And that's just not going to change. We may all of a sudden hit a quarter where you get one of these large ones and we may have a quarter that does $10 million instead of a yearly project that does $10 million.
What about the current margin profile of the company and where it can go, long term, as you grow?
Todd: Margins are actually quite beautiful. Look at the four components to our revenue stream, the first of which is software, 90%-plus margin. The second of which is professional services. Professional services is in the 60% range. Data sales are in the 90% range and then new terrain mapping is in the 60% range. Together they make a nice portfolio. The risk in our strategy is timing.
To sum things up for investors who want to know why they should take a look at Intermap, what are they key things you'd highlight?
Todd: In the last three years we've been able to take a company that had lost a significant amount of money and now we've had six consecutive quarters of EBITDA-positive performance. We now have a software platform that allows us to grow and grow a lot for what would be minimal increase in costs. And we are leading an industry, which has much larger companies than Intermap, down the solution path. All of the industry will ultimately have to provide solutions like us because there are going to be too many people just supplying data.
If there are larger companies out there and you have unique solution they all need to offer, does that mean Intermap might end up part of a larger company?
Todd: I see incredible opportunity ahead for the company and I'm rallied around executing on it. We keep enhancing our solutions and building our technology. What we are building is unique in the industry and is extremely powerful technology. My focus is on monetizing these incredible assets through customer wins. But to answer your question, do I anticipate that what we are creating will be the envy of a larger company that could seek to acquire us? I do. That would make a lot of sense for them, innovation is the key to all businesses.
Let me sneak in one more. What's your response to investors who say, "Hey, I've been watching you for a while. I may even have been a shareholder for a while. And we haven't seen the company hit the big time yet." Why should they stick around?
Todd: They should stick around because the opportunity is still bigger than we'd ever imagined it would be. There are more and more countries that need the spatial data infrastructure. You can read in the papers every day about disasters that hit countries around the world. They need us to rebuild. They need us to attract new business into their countries. There are more and more applications that need spatial information to make good decisions for companies and countries. There's a tremendous and growing need for solutions and limited parties with the expertise and technology to offer them. The industry is really turning to our sweet spot.
Thank you for the conversation.
Todd: You're welcome.
Additional disclosure: I will not trade shares of the company for the next 7 days. My compliance department will provide to Seeking Alpha written confirmation of my compliance to this restriction.