Eight Capital ReportPlaying the Waiting Game for UR Constellations; Resetting Target to $2.75
UrtheCast reported lackluster results yesterday that shed further light on significant seasonality on the EO business, while the new CFO had his opportunity to reset the Street before more visibility on the constellations are gained. Previously, we had modeled some OptiSAR build contribution in the back half of Q4, but with the FY guidance, which does point to a significant revenue ramp in the remainder of the year and is likely conservative on the low end, pushes us to strip out the constellation revenue build until we finally see execution. On the conference call, management highlighted two key items:
1) significant confidence in the guidance range with potential upside on larger opportunities in the funnel (excluding the constellation opportunities); and
2) while timing on MOU conversions remain challenging to predict, the UrtheDaily Constellation related announcements are anticipated this summer.
We remain confident on management’s ability to execute on the constellations, but as we unveil our F2018 estimates, we would rather stay on the cautious side and not put out aggressive estimates that include constellation contribution. Hence we have removed these for F2017, resetting our numbers based on management’s guidance, and providing conservative growth metrics on the base business into F2018. With that in mind, we are lowering our F2017 estimates, unveiling F2018, and resetting our target to incorporate a more conservative revenue build on the base business while providing a NPV to the first three MOU contracts' estimated margin contribution. We are lowering our target price from $3.50 to $2.75 per share on this basis. Going forward, we will update our target as management executes on providing details around MOU conversions or when the UrtheDaily platform gains customer and financial support to become a reality.
Key Highlights
• Net revenue (non-IFRS), excluding non-cash revenue, was $9.4mm, below our $12.2mm expectation and consensus at $12.4mm. Sales of earth observation imagery were $1.6mm (+20% y/y), vs. our $3.9mm estimate.
• Adj. EBITDA was ($1.3)mm, below our and consensus expectations at $1.1mm. Adj. EPS was ($0.04) vs. consensus at ($0.05) and our ($0.02).
• UR expects F17 revenue of $52-60mm (vs. prior consensus expectations excluding OptiSAR of $63.6mm and our $72.0mm), suggesting flat engineering services revenue and around 30% growth in EO revenue at the midpoint, with adjusted EBITDA of $7-12mm (vs. consensus of $18.0mm and our $25.3mm). Excluding our estimate, Street average was ~$15mm.
Maintaining BUY but lowering target from $3.50 to $2.75
We are unveiling our F18 forecast and also shifting our valuation forward to F18. Our new $2.75/share (from $3.50/share) target price is based on 22x F18E adj. EBITDA, a premium to EO peers, further supported by our DCF analyses. Another supportive valuation methodology is to ascribe $1.65/share in value to the base business and place a $1.10/share NPV to the first three MOU contracts' estimated margin contribution.
Q1/F17 RESULTS OVERVIEW
UrtheCast reported FQ1 results yesterday after market that were well below revenue expectations but in-line on earnings expectations while providing conservative guidance that disappointed against expectations. We highlight key takeaways from the results and the earnings conference call below:
• Revenue misses on significantly greater seasonality than anticipated. UrtheCast reported net revenue (non-IFRS) of $9.4mm, vs. our $12.2mm estimate and the Street's $12.4mm.
o Sales of earth observation imagery came in at $1.6mm (+20% y/y), compared to our $3.9mm expectation in what is described as the seasonally weakest period for the industry. While an update on pipeline was not provided, management did highlight that direct sales teams have now been fully deployed in 7 regions which we believe spans across established Spain and Latin American markets, with traction in newer markets including the Middle East, Asia Pacific, and North America. The company further highlighted they have expanded their reseller base to 55 which should help support the highly anticipated ramp in EO revenue. As for the HRC/MRC, the company did not have an update to share.
o Engineering and value-added services revenue was $7.8mm (-3% q/q), slightly below our $8.3mm expectation.
• Steady state cost base helps shield bottom line. Total direct costs and opex, less share based comp and D&A, came in at $10.8mm, slightly better than our forecast of $11.1mm and compared to $10.0mm last quarter. Management suggested this is roughly the new steady state level for opex going forward following the cost base reductions implemented over the course of last year.
• Earnings in-line. Excluding share-based comp, adjusted EBITDA came in at ($1.3)mm vs. our and the Street's $1.1mm estimate. IFRS EPS was reported at ($0.05). Adjusting for stock-based comp, amortization of intangibles, adjusted EPS came in at ($0.04) vs. the Street's ($0.05) estimate and our ($0.02).
• Disappointing F17 outlook. UrtheCast expects F17 revenue of between $52-60mm (vs. prior consensus expectations excluding OptiSAR of $63.6mm and our $72.0mm), suggesting flat engineering services revenue and conservative +28% growth in EO revenue at the midpoint, with adjusted EBITDA of between $7-12mm (vs. consensus of $18.0mm and our $25.3mm). Excluding our aggressive 2017 outlook, adj EBITDA outlook was on average near $15mm.
Balance Sheet shored up.
The company closed the quarter with cash and cash equivalents, and restricted term deposits of $28.3mm (net debt of $2.8mm) vs. $15.6mm (net debt of $15.3mm) last quarter, reflecting proceeds from the company's recent financing. The company also noted that they have obtained a $10mm revolver from RBC secured by receivables under their US$65mm engineering services contract - this currently sits undrawn as a large anticipated cash payment was recently received as per a payment milestone. UrtheCast also noted they have obtained an additional credit facility to finance up to €1mm of trade receivables.
ESTIMATE REVISIONS
We remain confident on management’s ability to execute on the constellations, but as we unveil our F2018 estimates, we would rather stay on the cautious side and not put out aggressive estimates that include constellation contribution; hence we have removed these for F2017, resetting our numbers based on management’s guidance, and providing conservative growth metrics on the base business into F2018. With that in mind, we are lowering our F2017 estimates, and unveiling F2018 based on a more conservative revenue build on the base business.
For F2017, we have pulled out $22.5mm in anticipated constellation build revenue from Q4 and tapered our overall EO imagery forecast down by $16mm to $19.5mm, implying a conservative 28% y/y growth. Total F2017 revenue now sits at $55.4mm, at the mid-point of guidance, representing 10% y/y growth (vs. 87% growth previously). This had the impact of lowering our adjusted EBITDA estimate by $17mm to $9.9mm (18% margin, vs. 28% previously), while adjusted EPS declines by 11 cents to ($0.02). For F2018, our new revenue estimate of $60.9mm implies another highly conservative 10% y/y growth, with adjusted EBITDA of only $15.9mm (26% margin) and adjusted EPS of $0.04. Our estimates incorporate some consideration for the significant growth prospects enabled by the PanGeo Alliance partnership but substantial upside to our forecasts remains.
VALUATION
Comparable Valuation Analysis
We are rolling our valuation forward to F18 as we unveil our F18 forecasts. Our new $2.75 per share target (from $3.50 per share) implies an F18E EV/Sales multiple of 5.7x, a premium to peers at 3x, and EV/EBITDA of 22x, a premium to peers around 11x. We believe this premium is justified by the company's significant growth potential as their disruptive business model continues to be de-risked and proven out.
Another way to look at our valuation is to ascribe a $1.65 per share target to the base business (EO imagery & engineering services less OptiSAR, UrtheDaily builds), implying a F18E EV/EBITDA multiple of 13x, which is in line with the higher range of the peer group, and a P/E multiple of 45x, a justified premium to its peer group average of 35x considering the significant growth levers inherent in the business. From there we add approximately $1.10 per share in NPV for the three MOUs that we have a high conviction will be converted into binding contracts. We used a 25% margin per contract and an 8% annual discount rate, assuming that these contracts will be recognized over a 3.5 year term starting at the beginning of 2018.