An incredible transformation
18 months ago when I visited GomSpace for the first time, the company was crammed into Novi Science Park with a handful of other companies of similar size, employing 35 people at the time. GomSpace's production area was roughly 50 sqm, with a handful of desks available for assembly. IT systems were appropriate for a small scale business.
Fast-forward to today, GomSpace has undergone major transformation. The company has moved to a 6.500 sqm facility, has opened subsidiaries in Singapore and the US, is well into the process of implementing an ERP system and has grown the workforce to 148 employees.
The massive organizational progress has gone hand in hand with an equally impressive commercial success. In 2015 GomSpace reported SEK 35M in sales. Over the last nine months, three constellation customers have been secured with an estimated order intake of SEK 800M to be delivered over the next three years.
Given near-term (12 months) constellation opportunities in the pipeline (more below) with a value of SEK 0,5-1B according to my estimate, the company is facing a scenario in a couple of years when a bigger, dedicated production facility will be needed.
The transformation has certainly not gone unnoticed. The share price is up by 700% in 18 months and the CEO Mr Buus was just named "Business Leader of the Year" in Denmark.
Going forward GomSpace's strategy can be divided into three parts; 1) Winning constellations, getting down the cost curve, 2) Becoming a turn-key provider, 3) Executing a spin-out strategy.
Winning constellations, getting down the cost curve
The importance of winning large constellation orders cannot be stressed enough.
- Constellation customers will be repeat customers assuming they are successful in building their businesses. Satellites will be replenished every 4-5 years due to rapid technological development and short life-time by design. This means recurring revenue and visibility.
- By being first to build large constellations, GomSpace is getting up the learning curve and at the same time getting down the cost curve. This will position the company to win even more orders, further distancing competition. As in many other hardware business, the number 1 player in nano satellites will likely capture the bulk of industry profitability (like Applied Materials, Intel or ASML for example). GomSpace is thus far head and shoulders above competition, enabled by the SEK 225 mln capital raisings since the IPO.
Constellation opportunities ahead
So far, GomSpace has secured three constellation orders of varying size.
-The SSG constellation of 200 sats for the equatorial region worth €48-70M.
-The global AISTECH constellation of 80 sats worth €12.5M
- The A&M equatorial constellation of 8 sats, worth an estimated $7-8M
GomSpace has also won a handful of technology demonstration orders that could turn into constellation orders;
- The Hawkeye360 project, with a potential of 18 sats
- The Arctic Surveillance project from DALO (Danish Defense) with a potential of 10 sats
- SpaceQuest, with a potential of 64 sats
- A&M potentially growing to a global constellation of 80 sats.
- Chinese customer Spacety with unknown ambition
These are some of the known customers, but activity in the sector is very high. Venture capital funds are pouring money into startups. In the last 12 months alone, $3B has been invested, a 50% increase y/y. This makes NewSpace a top-3 segment to attract venture capital.
But the posibility to using very small satellites to gather data is not only catching the attention of startups. Interestingly, according to industry sources, at least two of the big satcom incumbents are contemplating IoT/M2M-applications using nanosats. Such projects would most likely be worth several hundred million SEK if not billions and have a global reach.
Lastly, the time from pilot to full constellation order can be short as exemplified by both SSG and AISTECH. Both GomSpace customers placed their constellation order within 12 months of the pilot order.
Becoming a true turn-key provider.
True to their company slogan ”We help teams across the globe achieve their goals in space”, GomSpace has evolved from a subsystems-supplier to delivering complete satellite platforms, offering launch brokerage and setting up satellite management operations in Luxemburg.
The satellite management operations subsidiary was announced in September and the founding father of GomSpace Mr Alminde is moving to Luxemburg to set up the operations. Satellite operations is a big revenue opportunity and by having this capability, GomSpace is moving up the value chain and at the same time lowering volatility in future earnings. As in many other hardware industries, annual service contracts could be in the 15%+ range of the value of the investment. The margins in such a service business should exceed hardware margins over time and tie clients even closer to the company - the costs of switching supplier will be very high.
Executing a spin-out strategy
No doubt, there will be massive value created using nano satellites to deliver data and new services. GomSpace has a spin-out strategy to capture some of this value creation, while at the same time seed-funding future customers. An important criterion for seed-funding such a project is that no potential or current customer is developing a similar service.
Aerial & Maritime (A&M) was the first such spin-out. The company was set up in November 2016 when GomSpace and Danish Investment Fund for Developing Countries (IFU) invested $9.2M to create a company to offer airline- and ship tracking services in the equatorial region through the use of four satellites built by GomSpace, containing ADS-B and AIS transponders.
In November 2017 A&M expanded the project to eight satellites through a $5M investment by private investors. Very little information about A&M has been disclosed so far but looking at Aireon, who has a competing service (although offered from 750 kilogram Iridium satellites), the airline industry's interest in the data is big. Aireon has spent a lot of money marketing the benefits of space-based ADS-B and thus created an awareness that A&M can benefit from. Aireon is already launching through Iridium and will likely have their network in place for a global data service already in 2018. A&M will be some time behind Aireon, but since A&M is using much smaller satellites (less than 10 kilogram), capex is much lower and the price of the service likely much lower too. If successful, A&M could provide to be a very valuable asset for GomSpace shareholders on top of being a large customer to the company.
GomSpace has announced two other potential spin-outs thus far, a project called "Beam Watch", where nano satellites will be used to measure performance of communication from very large constellations (400 sats). In another project, GomSpace and the ANSP (air traffic authority) of Singapore is developing a service to offer VHF-radio "over the horizon". Today, VHF-radio only works within 80 kilometers from the airport tower. This leads to congestion and unnecessary emissions and circulation over airports.
Confidence in revenue estimates
The current plan is to scale production capacity to 1 satellite per day. During my visit, the production manager pointed out that there are 365 days in a year (in case you did not know!). To translate this into revenue potential, one needs to make assumptions about ASP. This is not an easy task since all satellites are created differently.
Firstly, there are many different sizes. Historically, mainly 1-3 U satellites (1U = 10x10x10 cm) have been sold. This is because historical projects were either academic or technology demonstrators with short design lives. As the technology matures, larger and larger satellites are being used. The GOMX-4 twin satellites (one owned by DALO and one by ESA) to be launched in February 2018 are 6U. The initial SSG contract for 200 "pearls" (€35-55 mln) was initially designed for a 6U platform, but the customer realized a bigger platform was needed and thus upsized to 8U, leading to a €13-15 mln follow-on order recently. In the future, as technology develops (to broadband applications for example) there will likely be customers using 12U, 18U or even 27U satellites.
Apart from size, there are other considerations that determine the price of the satellite. Is the client buying the payload from GomSpace? Is propulsion required? Is very exact altitude determination required? Etc.
In summary, ASP is not an easy or even relevant metric to forecast, but it should be safe to assume that if GomSpace manages to reach the goal of having a capacity to produce just shy of 400 satellites per year in the next couple of years, and manages to sell that capacity, my estimates are clearly supported and could even be too low (2018: SEK 250M, 2019: SEK 425M, 2020: SEK 680M, 2021: SEK 1B). In the years after 2020, GomSpace could start generating substantial service revenue as some of the first large constellations are in place. According to my estimate a service contract with SSG if won, could contribute SEK100M+ to 2021 revenue.
Valuing a company like GomSpace is difficult. The stock looks expensive on current EV/S and EBIT is probably negative for at least another 3-4 quarters. It is up to each investor to determine at what level the share is attractive but to me this is an opportunity too large to ignore. We are entering a "Space Age", with massive investments in space-based infrastructure over the next several decades. Investment banks are slowly waking up to this fact, as exemplified by thematic research published by Goldman Sachs, Morgan Stanley, Merrill Lynch and BNP Exane over the last few months.
I would make an analogy to the additive manufacturing (3d printing) theme that was heralded as a major future technology a few years ago. I was invested in Arcam 2013-2016 after being somewhat late to discover additive manufacturing. The stock always looked expensive and attracted mostly international technology funds (for example Oppenheimer bought the 10%+ stake sold by Industrifonden). The company was acquired by General Electric in 2016. GE's bid valued Arcam at SEK 6B, roughly 9x group sales although the company had won very few volume orders at the time and was struggling to break even with poor gross margins due to under-absorption of manufacturing costs. Incidentally, the best peer to Arcam, German company SLM Solutions is also trading at 9x sales currently.
Arcam and SLM Solutions are by no means perfect companies to benchmark. In many ways you can argue that GomSpace should trade at a premium to manufacturers of additive equipment.
- Replacement cycles are much shorter 4-5 years of nanonsats vs 10-12 years for a 3d-printer.
- Satellite management is similar to the metal powder business of Arcam from the perspective that it gives after-market revenue. But margins in sat management are problably 20%+ vs 12-15% for metal powder manufacturing.
- GomSpace is seed-funding startups within NewSpace, which will give shareholders a broader exposure to the investment theme.
- About 15% of Arcam's revenue at the time of acquisition came from a contract manufacturing business called DiSanto with very poor margins and negative growth.
Lastly, while I dont predicate my bullish view on GomSpace on an eventual acquisition, I think the most likely long-term scenario is that one of the big Aerospace companies acquires GomSpace. Given Airbus' interest in GomSpace's / A&M's knowledge within space-based ADS-B, Airbus is the prime suspect to bid for GomSpace. I think the recent press-release between the two companies adds credibility to this hypothesis.
Disclosure: I am/we are long Gomspace.