Very interesting company. I'm mostly intrigued by the weather/insurance services and feel Spire would benefit from a large insurance company (cough cough Markel) buying them and removing current leadership.
Net income margin of -110% on top of a huge pile of high-interest variable debt is pretty scary. With a limited runway, does this thing really have a path to survive? If honestly hard to see.
I think the first thing to be conscious of is the full lifecycle of the business. This is a narrative-driven investment based on some unique capabilities developed on a shoestring budget for over a decade now. Went public to have the legitimacy to chase larger deals that require the customer's confidence in a lasting enterprise. CEO said something along the lines of, "Putting in an multi-million $ RFP from a NYSE-listed company is a lot different than putting it in from a VC-backed company."
Second, the key point is its cost of revenue is now fixed, paving a clear path to 70-80%+ gross margins with continued revenue growth.
Cash margins are also much more important than net income margins. Free cash flow margin improved 40 pecentage points y/y to -66% in in Q1 23 and touched -36% in Q4 22 (125 percentage point improvement). OpEx has been flat to down for 4 quarters now while ARR has grown over $20m. As it gets paid for those contracts, it should flow through to the bottom line.
It's a hairy opportunity, but I like the odds. Worst case I bet they slash R&D, S&M and return to barebones while they clean up the capital structure (a doable option). Mid-case, they dilute equity at terrible prices. Best case, they reach positive FCF on long-stated timeline, and equity is likely worth multiples of what it is now if so. Most concerning thing to me is tight covenants on debt, which would force dilution if broken. I think this is the most likely option, but I still think it's a reasonable price given this scenario.
Also have a tough time believing the bankruptcy case given some recent contract wins from customers with quasi-unlimited budgets compared to Spire's size.
The net income margin has steadily improved from -110% in Q1 2022 to -84% in Q2 2022, -80% in Q3 2022, -72% in Q4 2022, and finally to -59% in Q1 2023.
Tim - great write up. I’ve looked at Spire in detail too. Three concerns that have held me back for now. One you mention - Platzer and governance. Time will tell but if company succeeds he will be feted and vice versa. Second is sales speed. Unit economics are clear but we need more volume through the business to reach sustainability. Despite recent wins, other peers are reporting lengthening sales cycles (listen to Planet recent earnings calls) and Spire is path dependent given the leverage. Third is customer concentration and the nature of the weather data market where NOAA etc share data which limits economics in that segment. This will be solved as other segments grow. So I’m watching NDR and overall revenue growth closely and that is the bet you are taking here in my view. Btw, Planet also looks interesting, and is safer in my view given the near $400m cash, better governance, and better NDR. Their markets are not completely orthogonal despite imaging vs radio and maybe in the long run we see consolidation. Thanks for sharing!
Thanks for sharing your thoughts, David. Also follow Planet pretty closely -- it's a larger position for me given the healthier balance sheet. Think consolidation is virtually certain over the next decade, and the two are well positioned having built sizable businesses already.
Tim - thank you so much for the note. Absolute bullseye on the underlying drivers. Both Planet and Spire are clearly past “MVC” and should be building the additional loops, if they get it - which makes for a falsifiable investment thesis. Spire’s space services business and Planet’s acquisition of Sinergise could be relevant in this regard.
Very interesting company. I'm mostly intrigued by the weather/insurance services and feel Spire would benefit from a large insurance company (cough cough Markel) buying them and removing current leadership.
Net income margin of -110% on top of a huge pile of high-interest variable debt is pretty scary. With a limited runway, does this thing really have a path to survive? If honestly hard to see.
Thanks for reading, Devin. Big fan of your work.
I think the first thing to be conscious of is the full lifecycle of the business. This is a narrative-driven investment based on some unique capabilities developed on a shoestring budget for over a decade now. Went public to have the legitimacy to chase larger deals that require the customer's confidence in a lasting enterprise. CEO said something along the lines of, "Putting in an multi-million $ RFP from a NYSE-listed company is a lot different than putting it in from a VC-backed company."
Second, the key point is its cost of revenue is now fixed, paving a clear path to 70-80%+ gross margins with continued revenue growth.
Cash margins are also much more important than net income margins. Free cash flow margin improved 40 pecentage points y/y to -66% in in Q1 23 and touched -36% in Q4 22 (125 percentage point improvement). OpEx has been flat to down for 4 quarters now while ARR has grown over $20m. As it gets paid for those contracts, it should flow through to the bottom line.
It's a hairy opportunity, but I like the odds. Worst case I bet they slash R&D, S&M and return to barebones while they clean up the capital structure (a doable option). Mid-case, they dilute equity at terrible prices. Best case, they reach positive FCF on long-stated timeline, and equity is likely worth multiples of what it is now if so. Most concerning thing to me is tight covenants on debt, which would force dilution if broken. I think this is the most likely option, but I still think it's a reasonable price given this scenario.
Also have a tough time believing the bankruptcy case given some recent contract wins from customers with quasi-unlimited budgets compared to Spire's size.
The net income margin has steadily improved from -110% in Q1 2022 to -84% in Q2 2022, -80% in Q3 2022, -72% in Q4 2022, and finally to -59% in Q1 2023.
This aged beautifully.
Tim - great write up. I’ve looked at Spire in detail too. Three concerns that have held me back for now. One you mention - Platzer and governance. Time will tell but if company succeeds he will be feted and vice versa. Second is sales speed. Unit economics are clear but we need more volume through the business to reach sustainability. Despite recent wins, other peers are reporting lengthening sales cycles (listen to Planet recent earnings calls) and Spire is path dependent given the leverage. Third is customer concentration and the nature of the weather data market where NOAA etc share data which limits economics in that segment. This will be solved as other segments grow. So I’m watching NDR and overall revenue growth closely and that is the bet you are taking here in my view. Btw, Planet also looks interesting, and is safer in my view given the near $400m cash, better governance, and better NDR. Their markets are not completely orthogonal despite imaging vs radio and maybe in the long run we see consolidation. Thanks for sharing!
Thanks for sharing your thoughts, David. Also follow Planet pretty closely -- it's a larger position for me given the healthier balance sheet. Think consolidation is virtually certain over the next decade, and the two are well positioned having built sizable businesses already.
I've thought a good deal about the sales velocity as you mention. An interesting read on the topic is https://pivotal.substack.com/p/economics-of-data-biz
#3 and #4 are particularly relevant. Hope it's helpful to your thinking
Tim - thank you so much for the note. Absolute bullseye on the underlying drivers. Both Planet and Spire are clearly past “MVC” and should be building the additional loops, if they get it - which makes for a falsifiable investment thesis. Spire’s space services business and Planet’s acquisition of Sinergise could be relevant in this regard.