Selling Spire's Maritime Business
A few thoughts on the transaction
Note: I previously wrote up Spire Global as Investment Idea #1.
Spire Global reported some unexpected news this week: it’s selling the maritime business unit to Kpler.
For those unfamiliar: Spire is a satellite data subscription business. It builds, owns, and operates ~100 satellites that collect RF data for maritime (tracking ships), aviation (tracking planes), and weather (tracking the atmosphere) uses. Customers subscribe to data feeds, not unlike how you subscribe to Bloomberg.
People like to think of Spire as a satellite operator, but no satellites are changing hands in this deal. Spire is selling a $40M book of business, exclusive rights to a contract with L3Harris (granting access to real-time AIS data from an Iridium Next AppStar payload), software IP, and dedicated employees.
Much of what will be sold was acquired three years earlier for $129M (exactEarth). So, with a sale price of $241M, almost a double in 3.5 years. Granted, it’s not apples to apples, but not too bad.
The news caught me by surprise. I had no idea Spire was looking to sell maritime. I had no idea the business operated in a way that even allowed it to sell the maritime unit. I learned something, and as it turns out, they weren’t looking to sell; they received an unsolicited bid, then ran a competitive process.
In all, the company seems to have negotiated a pretty favorable deal. It keeps the maritime US government contract, all of its technical infrastructure, and gets paid $7.5M (included in sale price) for services over the next year. Maybe that extends beyond a year; the potential is there for a longer-term relationship.
My initial thoughts are positive; I like the sale because it removes (significant) balance sheet risk, taking out $115M of debt and a $16M annual interest payment. On the other side of this deal is a more focused business with ~$110M of net cash, a far cry from its tenuous financial position today.
Some numbers
Still, we have to understand exactly what is being sold, and what it’s selling for. What does the maritime business look like?
We know revenue was $40M in the LTM period, but its evolution in recent years is more important. Management couldn’t provide any answers on the call (due to impending restatements), but we can try to make some sense of what we have.
A decent starting point is exactEarth pre-acquisition. Three years ago (LTM Oct. ‘21), exactEarth alone did almost $24M of revenue. With a few assumptions, we can put together this little table:
My unscientific estimates yield a maritime business growing top-line ~10% and gross profit faster. At $40M of revenue, it’s a decent asset, but it’s sub-scale, unprofitable, and not growing very quickly; ~6x revenue seems like a good price for the seller, especially when accounting for the immediate balance sheet relief.
Understanding the tech
One of my immediate concerns was whether selling the maritime unit would decrease the constellation’s capacity utilization. Having owned Spire for over a year now, it’s embarrassing to admit my shortcoming as an analyst.
In theory, I understood Spire’s satellites were multi-purpose, but I didn’t quite internalize what that meant.
Peter Platzer: “LEMUR stands for ‘Low Earth Multi-Use Receiver.’ So every single one of our spacecraft has multiple payloads that run, to the extent allowed by power, in parallel. But what it means is that if, for whatever reason, we decide to produce less AIS data going forward because maybe we don’t need as much for the government business, then the same spacecraft, the same design, will produce with that available power other types of data like weather data, aviation data, RF geolocation data.”
Essentially, power constraints force the sensors in orbit to constantly cycle duty. I’m not sure exactly how the duty cycle is determined, but the constellation manages to accomplish a lot in aggregate; it tracks every ship and airplane 200x a day and collects 20,000+ weather profiles daily.
Reducing AIS coverage means they can allocate more power to the remaining sensors and reduce electromagnetic interference. ADS-B doesn’t require much power, but RF geolocation and radio occultation require a lot and benefit a great deal from less interference.
Spire has long stated its plan to reach 100,000 weather profiles daily. Longer duty cycles for radio occultation sensors could accelerate this outcome, while fewer active sensors should improve the overall quality and reliability of the data they do produce, at least from what I understand. (Let me know if that’s incorrect.)
Thinking strategically
Since inception, Spire has seemingly taken a quantity over quality approach to data collection. If it reaches 100,000 weather profiles daily, Spire’s brute force methods will continue to drive separation from competitors.
From this angle, a potential strategic rationale becomes more clear. Focusing on signals that require lots of power and lots of processing (i.e., RF geolocation and radio occultation) could be a tactic to develop defensibility and make the system more difficult to replicate.
This chain of reasoning opens the possibility of shopping the aviation unit next (at the right price) to redouble their focus on the more complex and defensible RF geolocation and weather units.
For my money, I think that’s unlikely given the diminishing returns of eliminating the low power ADS-B signal. Plus, the EURIALO contract is a huge commitment (though that might be housed in Space Services?). Either way, it’s unclear, and this is pure speculation. We’ll have to wait and see.
It may seem like too much reading between the lines, but I think it makes sense. Peter Platzer is a strategist with an indefinite time horizon (Spire is his life’s mission), and he thinks deeply about how to build the company intentionally.
I struggle to understand why he would’ve acted so opportunistically if not to accelerate his plan. He still owns 12% of the company, and executives/board members own another 5%. The story below is worth reading in the context of this transaction.
What remains
When all is said and done, Spire will emerge from this with a healthy balance sheet, $75-80M(?) or so of revenue, and mild(?) losses. It’s an unusual situation because the size of the Remain-co is so uncertain. The latest financials are from Q1, and even they can’t be trusted because of the impending restatements.
With persistent uncertainty and an elevated stock price, I caught myself thinking about selling this week. That’s generally not how I operate, but the position has now grown to almost 20% of my portfolio, and it’s not exactly a sure thing.
Competition in the space (ha!) is going up, not down, and the market can be slow-moving and somewhat bound to government budgets. I learned this lesson with my investment in Planet Labs (which I still think is a good bet).
However, when I step back, the company has exceptional characteristics. In ten years, it has built a truly unique asset capable of supporting long-term growth. It is selling a piece of the company for $240M. A talented founder with skin in the game remains in charge, and for the first time in a while, the company has the balance sheet to invest from a position of strength.
I say let the reinvestment wheel turn. Time is on our side, and I’m confident the enterprise value ultimately created here will far exceed what was just monetized.
Tags: SPIR 0.00%↑ Spire Global
Excellent update. I love how you zoomed out at the end and thought about things from the view over the next decade. Thanks for the great coverage!