Pure-play space companies are popping up and investors can be forgiven if they can’t follow all the business models. There are companies offering launch services, those that will build small satellites for customers, and even companies that plan to move satellites to different orbits like how FedEx delivers packages from a distribution center to consumers’ doorsteps.
It’s mind bending and, literally, out of this world. But there are also other space companies whose business models should be more familiar to investors and are easier to understand. Their value will come from selling subscriptions. Specifically, they want to sell you data coming from a myriad of sensors now floating above the earth.
One of those companies is Spire Global, which will go public by merging with a special purpose acquisition company, or SPAC, called NavSight Holdings (ticker: NSH). That deal was announced on Monday, and is expected to close this summer when NavSight’s ticker will change to “SPIR.”
Spire runs a constellation of over 100 satellites, which collect 5 terabytes of data each day and beam it down to the company’s 70 ground antennas in 16 countries. It then processes and analyzes that data—which covers every spot on earth 10 times a day and can be used to track ships, planes, or weather—and sells access to customers on a subscription basis.
“Spire is a space-based SaaS company,” says its CEO Peter Platzer.
SaaS is short for software as a service. Software becomes a service when customers pay monthly or yearly fees instead of buying one-off licenses when there’s a new release or update. Most of the software industry has converted its pricing model to SaaS-based models.
Investors prefer that because it gives them greater visibility into a company’s future cash flows and makes its revenues recurring. Software components of the S&P 500 have gained a total of about 130% over the past three years. That’s far better than the comparable 45% total gain of the S&P 500 over the same span.
Spire’s constellation is operational and the company is already selling data. It’s made up of relatively tiny satellites, each with multiple radio-frequency sensors, which Spire calls LEMURs, for Low Earth Multi-Use Receiver. The satellites’ sensors collect data both from the surface of the earth and from the atmosphere. Its 150 or so customers include maritime logistics companies that can track all their ships in real time, improving utilization and reducing waste.
“We are fully deployed and what this transaction allows us to do is to pump resources into sales, marketing, and product development,” Platzer tells Barron’s. “It’s not about building the infrastructure or inventing something brand new.”
Spire plans to have more than $900 million in sales by 2025, up from about $54 million projected for 2021. What’s more, Spire plans to generate about $425 million in earnings before interest, taxes, depreciation, and amortization, or Ebitda, by 2025 and generate positive free cash flow in 2023.
The SaaS model means some attractive profit margin forecasts. The capital expenditures required to get Spire’s constellation into orbit have already been spent, and the company will only need to launch new satellites when there are new sensors or technologies it wants to offer. The marginal cost of adding a new customer is minimal, Platzer says. Spire’s forecast is for 91% gross margins and 84% free cash flow conversion once the business is mature in 2025.
Spire has a head start, but the true test of its business—and margins—will be several years down the road. As commercial access to space becomes cheaper and easier, competitors will become more prevalent.
The merger values Spire stock at about $1.6 billion, based on 164 million shares outstanding on a fully diluted basis. Based on where NavSight stock closed on Monday—at $10.99, up 5%—Spire stock is worth about $1.8 billion.
Spire will get about $445 million in cash after fees from the deal—$230 million from NavSight’s trust and $245 million from a public investment in private equity, or PIPE, funded by Tiger Global Management, BlackRock, and other investors at $10 a share.