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Edited Transcript of NEA.AX earnings conference call or presentation 20-Aug-19 11:30pm GMT

Full Year 2019 Nearmap Ltd Earnings Call

Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Nearmap Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Watt

Nearmap Ltd - CFO

* Robert Melville Newman

Nearmap Ltd - CEO, MD & Executive Director

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Conference Call Participants

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* Chenny Wang

Morgan Stanley, Research Division - Equity Analyst

* Owen Humphries

Canaccord Genuity Corp., Research Division - Senior Industrials Analyst

* Tony Scenna;Selector Funds Management;Managing Director

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Nearmap FY '19 Results Investor Conference Call. (Operator Instructions)

I would now like to hand the conference over to Dr. Rob Newman, Chief Executive Officer. Please go ahead.

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [2]

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Good morning, and welcome to the Nearmap FY '19 Results Conference Call. I have with me Andy Watt, our Chief Financial Officer. As you can see from our announcement this morning, FY '19 has been a transformational year for Nearmap. We saw record growth in our subscription portfolio, delivered a suite of new revolutionary products through increasing traction in our North American business and expanded to Canada. We also made strong progress towards accelerating our strategic growth initiatives, which we outlined at last year's capital raise.

Before discussing the results, let me review the unique position of our company and what was achieved today. At its heart, Nearmap is a technology company founded on the principle that we change the way people view the world so that we can profoundly change the way they work. Over the past 12 years, we have created and owned a rich continually expanding data set about the real world, providing high-value insight to a diverse range of businesses and government organizations. This benefits not only them, but our employees, our stakeholders and the broader community. Our Reality as a Service business model has democratized access to area imagery, bringing the power of its insight to new customers and new use cases. This business model, when combined with a continually improving efficiency with our technology and capture program, generates scalable gross margins. This generates effective unit economics across our sales, our capture program and, through our customer retention, our customer lifetime value. We are now uniquely positioned to be the global market leader in location intelligence derived from aerial imagery.

The aerial imagery market has evolved in its sophistication, and Nearmap remains focused on maintaining our position at the forefront of its evolution by bringing new features and new content to market. When we announced our capital raise in September last year, we outlined a number of initiatives we wanted to focus on, and I'll provide an update on those initiatives. Firstly, we're committed to expanding our product and content. Over the course of FY '19, we delivered on that commitment. In June, we launched Nearmap 3D, which provides customers the ability to stream and export 3D imagery on demand, and this is at an unprecedented scale and delivered through our MapBrowser Web application. Nearmap 3D gives customers a fully immersive 3D experience and allows them to measure distances and export customer areas in a variety of 3D formats. This fundamentally changes our industry such as urban planning, architecture, construction, government and councils and view and shape our cities across Australia and North America. Nearmap 3D is now in general availability, and we are again leading the market by providing this content via our streaming service.

We continued our investment in machine learning and launched a beta release of our artificial intelligence content in the second half of FY '19. We have built highly accurate machine learning model and deployed them at scale. This turned out millions of aerial images captured multiple times per year in a very valuable data set. These data sets can be used to more accurately and efficiently measure change and quantify attributes such as solar panels, pools, roof, construction sites.

I was pleased to announce to the market last month the first commercial sale of this content. Artificial intelligence technology is transformative for our business, and it is also transformative for our customers. This expanded product and content set has been made possible by the investment in our people. And in FY '19, we added 43 people to our products, technology and server operations team to deliver on this commitment.

Secondly, we earmarked the expansion of our sales and marketing team particularly in North America as a key priority. As part of that goal, we opened a fully strapped New York office in April of this year, specifically targeting the construction and engineering sector. Andy will touch more upon our successes in North America later on the call today. And finally, we added a fourth geography to our capture program when we expanded to Canada, exceeding our initial 60% coverage target. We have successfully leveraged our existing U.S. infrastructure in this market, and we will continue to invest to support our team in developing the opportunities in that region. Through our continued investment in our camera systems, our processing and our technology, Nearmap has positioned itself as a top 3 pure play aerial imagery company globally, delivering a broad range of imagery data set and insight to a growing list of businesses and geographies. The FY '19 results released to the ASX this morning reflects delivery on this investment.

And before I talk about the outlook for FY '20, I will hand over to Andy to take you through the financial highlights of FY '19.

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Andrew Watt, Nearmap Ltd - CFO [3]

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Thanks, Rob, and good morning, everyone. As always, I'll begin by discussing our FY '19 performance with the metric which best demonstrates the value placed on our content, the annualized contract value of our subscription. As we preannounced in July, FY '19 saw the group portfolio grow to $90.2 million, a $24 million increase over the course of this financial year and 36% growth year-on-year. This growth was generated by strong performance in sales to new customers as well as continued growth to our existing customer base. In FY '19, we added another $17.4 million in new subscribers for Nearmap, a 40% increase from FY '18, which in itself is a 39% increase on FY '17, highlighting the market opportunities that continues to exist for new users of our content.

The other key element of this growth to highlight is churn, which at $3.5 million in FY '19 was lower in absolute dollar terms than in FY '18. As a percentage of ACV, 12-month rolling churn has fallen from 7.5% of the group portfolio to 5.3%. This reflects with our content becoming more embedded into customer workloads as well as the customer-centered focus on our sales and marketing. We don't deliver the margins that we do without attracting competition, which we're also pleased to see churn continue to fall. We also know that we need to continue to invest deeper into our customer experience and product content offering to manage churn effectively. We measure the productivity of our sales and marketing efforts with the Group Sales Team Contribution Ratio, which is 106% this year. This means that for every dollar invested in direct sales and marketing, we generate over $1 in incremental annual subscription value from our customers in the same period. With an average customer licensing at 18 years, this equates then with 20-to-1 return on our sales and marketing investments.

As we've always said, we will invest more heavily into sales and marketing where (inaudible) of total return. And the second half of FY '19 has seen us invest in further building our sales and marketing team in the U.S., including the opening of a second North American sales office in New York. Given the large and expanding market in which we operate and our compelling unit economics, we're willing to accept near-term pressure in the sales team contribution ratio, given the account that this investment is expected to generate.

Looking at growth in each territory, the combined North American portfolio of the United States and North -- Canada has increased more than fourfold in the last few years. ACV grew by a record USD 9.8 million in the year to $23.7 million. This was driven by $7.9 million increase in new business ACV with great traction from both the SME and the international partners businesses.

Churn continues to fall with 12-month rolling churn now at just 4.4%, an outstanding result. And for the first time, churn in North America is now lower than with the ANZ business. Our continued focus on broadening the North American subscriber base saw the number of subscriptions increase by more than 50% into the course of the year to 1,425. Nearmap continues to sign up SME customers in North America, delivering our content to more and more businesses that haven't purchased aerial imagery before. Our ANZ business further enhanced its market leadership position and recorded another strong period of ACV growth of $9.1 million, a 19% increase from FY '18. This growth was driven by $6.2 million in new Nearmap customers and expansion to the existing portfolio of $2.9 million. 12-month rolling churn fell down to 5.6%, down from 7.3% at the end of FY '18.

Reflecting the importance of our content in customer workflows, 40% of our great portfolio have subscribed to Nearmap on multiyear deals, up from 45% last financial year. IACV, almost 30% of our customers are now up setting enhanced Oblique, panorama or 3D content as part of their subscription, highlighting the value customers will see from this content and significantly hitting customer retention in [the year].

With subscriptions broadly increasing 11% to 9,800, our customer base is diversified across a range of industries and use cases. Despite a potential uncertain economic outlook, there has been very little change to the makeup of our customer base, and subscription growth remains good across our core customer segments. Given the change in accounting estimates, the capture cost and the impact on accounting gross margins, which I'll discuss shortly, we are now calculating our portfolio lifetime value within pre-capitalized gross margins to reflect the cash cost of capture in this metric without the impact of accounting adjustment. Portfolio growth, the reduction in churn and an improvement in pre-capitalized gross margin have seen the lifetime value of our subscription portfolio grow by 115% to $1.2 billion at the end of the financial year. Reflecting this growth, total revenue, excluding other income, grew 45% to $77.6 million. North American revenues of $24.5 million in our 6-year capture are more than double the revenues generated in Australia in the equivalent year. Reflecting disciplined cost management and further demonstrating the scale in our business model, the rate of growth in the operating cost base is less than 2/3 that of revenue growth. Group operating expenses increased by 29%, and closed the year with EBITDA of $15.5 million, representing a margin of 20%. While saving $70 million in September last year, the company has been disciplined and strategic when deploying capital and assessing near-term investments made today. Our focus very much remains in driving these returns.

I mentioned before the change to accounting estimates. As you all know, in 2013, we capitalized capture costs and amortized these costs on a straight line basis over 5 years. We review the appropriateness of the amortization period and methodology on a regular basis, and in light of the growing need for the most recent imagery, we concluded that the business has evolved such that a change in accounting estimate be applied to reduce the amortization period from 5 years to 2 years. The change is expected from January 2019. In other words, we accelerate the amortization of the capture asset from this period, which does not mean that we write (inaudible) rather in calculating the amortization (inaudible) assets over 2 years and then apply it to the recent known asset value as of the date of the change. It is worth ensuring that this change in accounting estimate has no impact on ACV, cash or EBITDA.

In FY '19, an additional $8 million of amortization was accelerated through the P&L with a constant impact to accounting gross margin and EBIT. If we strip out the accounting treatment for capture costs, then we see that the pre-capitalization group gross margin increased from 63% to 69% over the year, with Australia and New Zealand flat at 91% and North America growing from minus 55% to plus 20%, reflect that we're continuing leverage and operational efficiency of the capture program in support of a growing customer portfolio. The evolution of our customer program has been driven by the ongoing investment in our capture technology. The North American system has been expanded for more than 430 urban areas in the United States, and we concluded our first full capture of Canada in HyperCamera 2 in June, covering 60 urban areas, 64% of the population and more than 20,000 square kilometers. We've now commenced our second capture of that region and we expect to have that capture completed next month.

(inaudible) the growth in initial target as part of the (inaudible) core business net cash inflows were $0.3 million during the year, delivering on our commitment to achieve cash flow breakeven from core operations in FY '19. We closed the year with a cash balance of $75.9 million, which includes the net proceeds of the capital raise. I want to remind you all that the reason we raised capital is to invest for future returns. $9 million was deployed last financial year into initiatives identified at the time of the raise, including the expansion into Canada, opening a second North American sales office in New York, and accelerate the new product and technology initiatives.

FY '19 has been another standout year for Nearmap with operating and financial management delivered on or ahead of targets. The strength of our customer proposition, the strength of our balance sheet and the strength of our unit economics benefited further and efficiency of the business that we've created. We've invested a significant amount across all areas of the business and pursued future growth opportunities. In FY '20, we see a focus on executing and generating returns on these investments.

With that in mind, I'll hand back to Rob to discuss our strategic priorities and outlook for the upcoming financial year.

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [4]

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Thanks, Andy. In looking forward to the strategic priorities and outlook for FY '20, let me reiterate our company's unique position at the end of FY '19. Aerial imagery is a key component of the global location intelligence market, a large and growing market impacting many aspects of business life. The companies that win will create and own rich location data and invest in insights that can be derived from that data. That is why Nearmap has spent years investing to deliver these insights across multiple formats in a scalable and efficient way. FY '20 will be the year in which our business capitalizes on the content and insight which our investments generate for our customers.

I will now talk to 3 key strategic priorities for our business over the next 12 months. North America represents the biggest opportunity for our company today, and we will accelerate our presence in that market. We will do this by stepping up our investments into sales and marketing and invest in greater brand awareness to more effectively promote our content and data offering to prospective customers in that market. Secondly, after a milestone year for our product and technology in FY '19, FY '20 gives the opportunity to commercialize and expand on its new content. We will continue to improve our product offering in line with customer feedback. Our objective of adding further tools and improving customer access to our 3D content is a reflection of this.

In June, Nearmap announced the beta rollout of our artificial intelligence content after a number of years of investment. We initially started by identifying 6 physical attributes. We now doubled this and intend to more than doubling this again in FY '20. Commercialization of our AI content can be accelerated by its availability in MapBrowser, and the team is focused on having this tool in the hands of our customers during FY '20. And to that point, our third strategic objective for FY '20 is solely focused on our customers and our relationship with those customers.

12 months rolling churn of 5.3% is an outstanding achievement for our company, but we operate within a competitive market in Australia, New Zealand and North America and we assume competition will continue to evolve over the next 12 months. In the past, we had spoken about deepening and broadening the customer experience, and this process will accelerate in FY '20.

With our company vision in mind, we continue to assess opportunities for organic growth and for acquisitions. However, our focus remains on continuing to deliver the scale emerging in our business for our customers. The ability to create 3D information and the opportunity to apply machine learning to our data not only opens up additional larger component of the global location intelligence market and enable Nearmap to provide further insight and solution to our customers rather than just data and content.

As important as our expanded location content offering into our customers, providing them with rapid insight from that data is a natural step in our evolution. Nearmap is uniquely positioned to be the global leader in the location and intelligence market for live and aerial imagery content. Our scalable subscription business model, clear technology leadership and a world-class team have put us in a strong position. In FY '20, we'll continue to invest in our team, our product and our sales and marketing to generate strong ACV portfolio growth.

With that, I will now open up the call to questions from the conference call participants.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Owen Humphries with Canaccord.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [2]

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Rob, Andy, congratulations on a pretty phenomenal year. I guess first question, just around the AI solution as you roll that out into FY '20. Can you just maybe touch on how you -- the kind of go-to-market strategy in terms of the pricing of that product? Will it be based on per image or per request? Can you just maybe touch on how you plan to monetize that feature?

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [3]

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Yes. Thanks, Owen. It's going to be -- again, we'll try to -- we will typically sell AI attributes on a subscription basis, so we stick with our ACV model. In terms of how those are valued, typically, the early sales and the interactions we've had with our customers during this beta period has been on a per attribute basis, so an attribute might be a pool in a property or a solar panel on a roof. So it kind of scales with the number of properties and the number of attributes that they -- that the customers are looking at. Some attributes will have higher value than others, but that's how we're looking to do it. But again, it will be on a subscription basis, so they'll get a certain number of included attributes inside of their subscription.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [4]

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Okay. Good one. And just focusing on the Australian business for a second. So I've noticed the subs growth is down to, I think, it was 13% during the period. Obviously -- sorry, 6% during the period. Can you maybe -- obviously the churn is extremely low. Do you feel like we're kind of in a maturing phase here on your current products that obviously new products are going to drive new customers potentially? But can you just maybe talk about your expectations going forward around subs growth around the new products and whether you think the market is maturing here?

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [5]

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Yes. A couple of elements to your question there, Owen. First of all, we see consistent growth in Australia. So there's still good demand and still plenty of new customers coming to Nearmap as well as opportunities to go deeper and drive existing customer accounts, and that's with our existing -- our normal 3D offer content. Obviously, we see that we can extend that -- the growth in the Australian market by the use of the new content, certainly measurable. Oblique is something that's new -- in terms of use cases in Australia, so that's where we're educating our customers, we're getting good engagement there. And 3D is opening up new use cases as well. And I think through FY '20, as we make general availability of our AI content, that will also extend the life of the Australian market. So look, it's a consistent growth going forward. I don't see any change in that in the foreseeable future.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [6]

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Right. Okay. And you do expect sales growth to continue into FY '20, '21 and '22?

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [7]

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Yes. So it's certainly not a maturing market in Australia. As I said, good growth for our existing products. And I think we do note in the release that there's increasing competition in the Australian market, so that may involve some price pressure on our 3D content, but I think that will be compensated by the premium content and there will also be the strong differentiation with our solutions with 3D, AI, (inaudible) Oblique and the long history of content we've got in Australia.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [8]

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Good one. And then shifting gears to the U.S. Your sales growth is very strong, 51% there. But the ARPU is also quite strong, call it, 20%. Now obviously, you're adding more, you would say, targeting the more SME clients. Obviously, the enterprise is very large for you guys. But just -- do you expect some dilution in the average revenue per subscriber there? It looks like that's still going strongly despite adding SME customers.

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Andrew Watt, Nearmap Ltd - CFO [9]

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Yes. That's right, Owen. So I guess we're -- I talked about it in this presentation, we're pleased with the growth at all levels in the U.S. business. So we're seeing that SME business, which we've been investing in for a period of time now, they will begin to take -- to gain traction, and you can see the customer numbers reflecting of that. But as you rightly pointed out, our ARPS continues to grow in the U.S., certainly that's indication that we're still attracting sort of larger customers, the enterprise customers, and that continues to be a successful sales channel for us. So at this stage, we're moving forward on all fronts. Over a period of time, do we expect that to gland? Yes, possibly. Those things stand today. And we're pleased that all sales channels are working effectively.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [10]

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Okay. Not much effect in the Q. But well done. It looks like it's full steam ahead for FY '20.

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Andrew Watt, Nearmap Ltd - CFO [11]

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Thanks, Owen.

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [12]

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Thank you.

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Operator [13]

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(Operator Instructions) There are no further questions at this time. I'll hand back to Dr. Newman for any closing remarks.

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [14]

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Thank you. And like always -- in fact, we do have an additional question.

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Operator [15]

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Yes, it's Chenny Wang from Morgan Stanley.

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Chenny Wang, Morgan Stanley, Research Division - Equity Analyst [16]

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I just have maybe just one. Just on the integrations with, I guess, third-party imagery programs, you guys sort of alluded to that previously. Do you sort of have any additional context on that or any additional update?

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [17]

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Yes. It's a good question. So basically about half -- approximately half of our content is consumed by an API into third-party apps. That could be anything like Autodesk, Esri, Esri software, architecture software, Revit, et cetera. So there are very large number of applications that make use of our content. That's fairly simple for our 2D content. There's a fairly limited number of interfaces or APIs to support that. As we get into 3D, there's a very large number of format, and we are continuing to support a broader set of those. So you would expect in our product roadmap over the next 6 to 12 months that we will continue to add additional supported format. There are more and more applications that can directly inject that 3D content. Again, our 3D content is streamed through net browsers, so our customers can use it without needing those third-party apps, unless they're doing sophisticated designs then they would export our content into their applications.

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Chenny Wang, Morgan Stanley, Research Division - Equity Analyst [18]

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So -- and I guess a somewhat related question on that. Obviously, you guys are investing in a second New York sales office to go deeper and harder in the geography. Are there sort of plans -- if I sort of look at it slightly different ways, you target verticals, potential vertical, [people] ?

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [19]

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Yes. So I think that our New York office that we opened in April this year testing really 2 things. One is a geographic focus and also industry focus at the same time. And as you can see, we've had incredible uptake in the United States relative to our growth in Australia. But actually, we believe by being even more focused, we can accelerate the adoption of Nearmap content and products. So we're watching closely the performance of our New York office and assuming that gives us -- by focusing this accelerated growth, then we would open other regional offices there as well. We'll probably talk more about that at the time of the FY '20 half year results.

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Operator [20]

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The next question comes from Tony Scenna with Selector Funds Management.

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Tony Scenna;Selector Funds Management;Managing Director, [21]

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Just a quick question on the -- in terms of both the Australian, perhaps to a lesser extent, and the U.S, but just with your net upsell, what sort of trend are you seeing there in terms of existing taking up new products?

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [22]

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Yes. Okay. Maybe I'll pick it at a high-level and then let Andy pick up from there. Upsell is still quite dependent upon some large deals. And so it's difficult to kind of take a trend analysis out of it. If you look at -- if you take out the large deals, we're certainly seeing, both in Australia and the U.S., upsell. And that continues to grow. But it's -- in terms of the larger deals, that will impact how much upsell there is any half versus any other half.

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Andrew Watt, Nearmap Ltd - CFO [23]

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Yes, that's right. And I think in the Australian market is you're right, you need content as well. The Australian market is less familiar with our new content base in terms of Oblique, 3D and as well the AI and [NL]. So it's -- I guess the sales cycle there would take a little bit longer in terms of those upsell conversations with those customers, albeit we still see a great opportunity to sell into that -- our existing customer base with that content.

In the U.S., as Rob said, particularly with those large deals, we see a little bit of variability there. But overall, we're pleased with the growth of our existing portfolio. We did see a lot of focus last year on new customer acquisition and monetizing new customers, and you can see that coming through the top line. So at all levels of the funnel, again, we're seeing strong growth. So still good opportunity for us to penetrate deeper into our existing portfolio. We're now at 30% of our ACV currently looking at consuming new content so we can continue basically to grow that further.

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Tony Scenna;Selector Funds Management;Managing Director, [24]

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And with respect to Australia, maybe there's a decline this year, a moderate decline. Are you expecting that to change with respect to the new product content coming through?

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Andrew Watt, Nearmap Ltd - CFO [25]

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No. I think that with the new content coming out, as I alluded to earlier, I think it was a great opportunity to go out. With conversations with existing customers, they see the value that the new content can bring to them. And we're already seeing success with that. As you know, we brought 3D online to the market in June. So still very early days there, but the early indications are very positive, so we're confident that we can still continue to grow existing portfolio through the course of FY '20.

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Operator [26]

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(Operator Instructions)

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Robert Melville Newman, Nearmap Ltd - CEO, MD & Executive Director [27]

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Okay. And since it appears to be no more questions, I will wrap it up now. So thank you, everybody. As you can tell, we're very proud of the year that we've done. Our team has done a phenomenal performance across products, technology and also our sales and marketing performance. And that gets us up in a very strong position for continued growth in our North American market, our Australian market and with our new content in FY '20. So with that, thank you for your participation today.

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Operator [28]

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Thank you. That does conclude our conference. You may now disconnect your lines.