ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

This meeting is being recorded. [Audio Gap] And that's trended very positively through the past 12 to 24 months. Next slide, please. And this table really just outlines the detail that we've looked at in the chart and in some other key metrics. But again, a high-growth year. A lot of momentum coming into FY '23, and we are optimistic cautiously around being able to keep the kind of growth momentum rolling in through FY '23 that we've seen in FY '22. Next slide. Thanks, Simon. And I think there's a lot of detail here, but just laying out the P&L itself, we were loss-making through the FY '22 period. We're very conscious of the changed lens of the market around large loss-making technology companies. We've made a very conscious decision to continue to invest in our sales and delivery capability. Keep in mind that we serve the very largest infrastructure companies in North America. And there's a certain scale and quality that we need to deliver to. We're building decades long relationships with these customers and building out that delivery capability is something that we take very seriously. We're aiming to build the best customer experience in our industry. The other element that we've continued to invest in is around product and technology development with a really acute focus on automation. So taking out -- our customers have very expensive engineers and they're very precious people within their businesses. We're trying to automate a lot of what they do through engineering workflows. And there's a little more detail in this presentation that outlines why automation, what we think really matters and it's what we've been consciously investing in through this year. We'll continue to do so into FY '23. And from a balance sheet perspective, we've got a very strong balance sheet. It's very sustainable now. We've got options in terms of levers. And we can choose timing now to operating cash and EBITDA breakeven. But we're in a really strong spot. We've got a very good lens, I think, on what our customers are asking us to invest in. Again, as mentioned, we're building these really long-term relationships with these large infrastructure companies. And we think if we can continue to win aspects of this market, we can keep these customers for decades to come. I think most of you on the call know a lot of these elements in terms of what we do. But essentially, we've got 3 software solutions. We're targeting the North American electric utility and communications market and their engineering companies. The business model upshot of where -- if you think where we came from 5 years or so ago as primarily a hardware company today, we're very much software based. Our customers pay us the recurring subscription to access any solution, and then they pay us an additive fee based on the usage of the software. And that's the way this industry does business on a per asset or per pole or per engineering exercise basis. And then we offer other value-added products such as IKE Analyze and IKE Invest, which is a trading platform. Just picture is better than words. In terms of our products, the primary revenue driver and the primary revenue growth driver for FY '23 is the IKE Office solution, which you can see here. So this is all around digitizing and bringing verifiable accuracy to network engineering. So we provide an end-to-end workflow for capturing engineering information in the field through to analysis of poles and assets in the back office by engineers and also dashboards that can show an executive or a manager, how everyone is doing, how our project is doing, so they can track multistate or even national network development projects. Our second product is called IKE Structural. So this is a CAD program. So it's taking that real-world information and turning it into CAD or 3D models, so we have one of the 4 accepted standards in the United States in terms of providing pole loading analysis. And our customers use this product every single day across their distribution engineering teams to design every pole in their grid to make sure they're meeting regulatory standards and also to make sure they're meeting your own engineering standards. And this is a real choke point in the industry, and it gives us access -- quite privileged access to the standards groups within utilities and communications companies. And our newer product, which is exciting, is called IKE Insight. And there's a lot of buzzwords here around low code AI. What low code means is with customers the ability to sort of drag and drop tools to do really complicated artificial intelligence analysis of the network. You don't need to be an expert in AI to be able to use the software. And why this matters, we believe, is that it gives us the ability to process existing data and new data that comes from any source about utilities power assets. So we can process data that comes from not just IKE devices but also from drones smartphone, satellites, thermal imaging, et cetera, and it plugs into all of the key systems across an electric utility network. And if we just go to the next slide. Thanks, Simon. Here's just an example here. The big opportunity in our industry, we think, is around automation and letting utilities and communications companies do much more with the raw data that they have. And this is just an example where we can now do automated detection of poles and pole assets, et cetera, using software. And taking some of these projects that can take utility years and many, many millions of dollars and do it with computers and machines. And so we're really excited about the way I can say, not only can plug directly into our customer base but can also drive automation in the 2 products that we look at prior to IKE Insight. Next slide. I'll go through this fast, but we're fortunate to be in the right place at the right time. We're supporting some really large macro market tailwinds that sit behind the problems that we solve for our customers. Next slide. Thanks. There's more than 3,000 electric utilities. They're all dealing with the same challenges in terms of aging infrastructure, aging workforce. A lot of regulatory and legal risk around keeping the power on and also not causing the next catastrophic event via the fire or power outage, and more than 2,000 engineering companies that service these electric utility groups. And fundamentally, we dramatically improve the design and maintenance process for poles, and we're digitizing or bringing a lot of these processes into a very modern age. And similarly, just in terms of where the United States sits for communications infrastructure build out, there's more than 200 comms companies here in North America in a race to build fiber. They're putting most of it on to distribution poles. Just next slide, thanks. Putting most of this infrastructure up. You can see this picture here, some 5G antennas that are sitting on a power pole. And this is just driving a huge amount of engineering work for the electric utility, for the communications company, for the engineering services firm. And we expect this to continue for at least next 5 years in terms of this explosion of fiber and broadband deployment. And we dramatically speed up aspects of the engineering process, which is the value proposition we sell to. Next slide, please. We've got more than 350 enterprise subscription customers today. and that's growing. The interesting part is that most of our growth through the last year, for example, came from existing accounts. Once we get our foot in the door and support the particular network project, the opportunity is just to grow and cross-sell our products across these groups. And we've now got quite a number of examples of customers that have gone from tens of thousand dollars per annum to hundreds of thousands, and in some cases, millions. So we could start to get some real scale in terms of accounts and account management. And I think that's a really exciting part. This isn't a winner-take-all market, but we're targeting the very largest groups. And if we serve these groups well and provide a great customer experience, we're going to keep them for decades to come. Yes. And we can really stand behind some productivity outcomes for our customers. We double speed of collection. We take 50% of costs and reflect out for electric utilities and on and on. So we've got some really strong value proposition items that we sell to, and this is why customers buy from us. And we're in a fortunate position now of having a customer council that includes many of the largest electric utilities in North America better standing behind our product roadmap and really helping us to make sure we're building the right capability for these key customers. And we deliver -- our sales and delivery model is direct. What we do is very niche. It's a highly unglamorous sector. It's really important, and it's a big market and delivering an end-to-end customer experience for us is really key. And so we employ outside plant experts. That's what our whole business is made up of and it's really part of the reason to buy for us. So we've got around 85 FTEs today, and a really talented group of folks that have come out of the electric utility space or the communications space. Yes. And also fortunate to have a great Board with deep industry experience. So 4 of us are based here in North America, And Rick Christie and Mark Ratcliffe based in New Zealand, but all folks that have got a lot of experience directly in our market and also with scaling technology businesses. Yes. So I think the summary is that we do expect the strong growth of the last year to continue into FY '23 and beyond through to March of next year. We've got a very strong signed contract backlog that underpins that view. On top of that, we do expect to continue to close new business and recognize that revenue through -- the sheer aspects of that revenue through this year. As mentioned, our balance sheet is strong. And we're, if anything, we're just becoming more and more focused. Everything we do, we've got very specific distribution applications that we support for our customers. We're not getting drawn into other parts of the infrastructure market. What we support is such a big problem. It's such a big market. We're just going to focus on harder and harder. So for us, it's about recognizing or delivering the backlog, the signed contract backlog. We've got sales campaigns that are focused on broadening the customer footprint that we have today. And we will continue to invest and enhance our 3 software products. And as I mentioned, our focus is really on bringing more and more automation and analytics capability to our customers. So that drives productivity for our customers. It can also drive much higher revenue per user or ARPU by customer type. And it's a pretty laser-like focus in terms of FY '23. And I'll stop there and be happy to take questions.

Great. Thanks, Glenn. There's a number of questions that have come through. [Operator Instructions] So the first question, Glenn, congratulations on the results. Can you please provide some color on how we should think about gross margins for the transactional side of the business? Where do they sit? And how should they improve?

So yes, the transaction side of what we do there are very different price points, depending on which transaction a customer contracts do. And at one end of the spectrum, let's call it a self-perform transaction. That's where our customer is using our software themselves. We don't touch it. It's 100% gross margin, but we take a small fee. At the other end of the spectrum is a customer will send us the raw data they're capturing the field, and we'll use our software to send them back a deliverable much higher revenue up to close to $100 per transaction, but there are some -- there are higher COGS associated with those transactions. So the blended gross margin, I believe, is 52% through the last year. And because we're introducing software technology into everything that we do, we expect that gross margin to continue to grow from a percentage perspective. And the ultimate goal is to have as much automation as possible. But we also want to track that value through the transaction structure.

Thanks, Glenn. Next question. Do you think there's an opportunity to grow at the same rate as FY '22 in the coming years? What are the opportunities and what are the challenges to continue growth at this time?

Well, yes, there certainly is -- we've got a lot of momentum and it has continued as well into Q1 of this year. We're 2 months into the first quarter. So yes, we do think it will continue. I think the challenge is just tied to execution now. Our products are rock solid. And yes, we just see a need to make sure we put the right team in place, the right plans in place in terms of customer acquisition and account management, account growth.

Great. Thanks, Glenn. Of the $15 million to $17 million of contracted pipeline for FY '23, can you give us an idea of or indication of the current split between subscription and transaction revenues?

Yes, the approximate split is around $6 million of subscription and the balance of transaction.

Thanks, Glenn. Are you seeing any cost challenges associated with the uptick in inflation in the business at the moment?

Well, I think there's competition for talent. I mean everyone's been talking about the competition for talent for Gee, as long as I can remember about 10 years and we need to be in the great resignation. I think we could stay with their hands in their heart. IKE has not lost any key personnel through the last 12 to 18 months. I think there's various factors for that. So yes, we've been pretty fortunate in terms of our [indiscernible] and build our team over the last year or so.

Great. Thanks. Artificial Intelligence solutions are traditionally data-heavy and therefore, low gross margin. What type of gross margin should we expect like inside, both now and as it scales?

Yes, that's a good question. I mean I hope the overused term in the market. We actually -- if we're presenting to a customer, we stay away from even mentioning AI or machine learning or because there's a whole graveyard of broken promises from companies that say they're doing this stuff, but they're not. I mean, for us, we are truly building an AI engine that uses machines and not people. So ultimately, for customers at scale, yes, we expect very high gross margins. And I think the question stems from, this is kind of part of the problem with companies that say they're doing AI that aren't. It's all just custom projects. They say they are using AI but end up with just with lots of people doing QA and QC and processing and reporting, et cetera. We're building a low code platform which means that our customers can drag and drop the kind of analysis that they wish to do. It doesn't require IKE. And we're also focusing in on very, very specific applications. We're not trying to be everything to everyone. We're trying to build automation for things like pole analysis and pole audit, vary specific applications that we can repeat and take to the whole market because every one of the 3,000 utilities we talk to have the same problem with pole auditing or pole inspection.

Great. Thanks, Glenn. You have 350 customers. What proportion of work done by the thousands of utilities and commerce businesses does this 350 represent? Putting it another way, what percentage of work is IKE doing for its customers?

Now just a small fraction. We're just getting started. So I think we've got around 5% of the addressable market. If you just look at the number of businesses that are involved in this area, there's about -- there's probably about 6,000. And we're in the early stages of growing a lot of our 350. So still early, but we are targeting the very largest and working our way down the market. And that includes the engineering companies. The engineering companies are becoming more and more important here in the North American market with the utilities and communications groups outsourcing a huge amount of their engineering. So the engineering companies really [indiscernible] that customer ecosystem.

Thanks, Glenn. If I can, so I can use data from different sources, i.e., drones, iPhone, et cetera, does that suggest hardware revenue will fall away over time?

Well, do you know about 2 years ago, when we were formulating our plans around bringing in AI and being agnostic to field data, we assumed so. But what we've learned is that our hardware devices are unique and valuable for very specific applications. So I think any of our customers have engineering feet on the street and need to do very specific work, particularly around structural analysis, the IKE device is still the very best tool to do that work with. And for that reason, we think that the IKE device remains a really important part of the offering. So I think hardware revenue, even though we reduced pricing quite significantly on hardware and increase the software pricing, we still had an uptick in hardware revenue last year based on demand. So yes, we don't see it going away.

Thanks, Glenn. Can you give us some more color on how to rollout development of IKE Insights tracking, how it's been received by customers you've shown it to? And can we expect to see it begin to materially scale this calendar year?

Yes. I mean, it should start to scale through this year. We've got some really high-quality Tier 1 customers that have been through first phase contracts, paid contracts. What we do know is that this market always takes it takes a little bit longer than we all want to really get to scale. Our customers are quite risk-averse, and they like to do things in controlled increments. But we do expect to see a really nice uptick of revenue from IKE Insight through this year.

Thanks. And can you comment further on research and engineering expense item? Do you see this continuing to increase? And is there some guidance for future expectations, just perhaps as a percentage of revenue?

Well, yes, it's the area. If you look at benchmarks in terms of functional efficiency, engineering development and research is the area where we're overspending in terms of where we will ultimately land, well, I wouldn't say overspending. That's where we're concentrating investment. It's simply because we've got a customer footprint now, and we've got some customers that are telling us what they're going to buy and what capability they need. So this year, we'll still have a slightly outsized investment into R&D, but it will -- I think will flatline. So relative revenue, it's going to get back into -- get into line from a functional efficiency perspective, taking in FY '24 and FY '25 lens.

Great. And just in terms of that commentary around R&D. Can you just talk to when you expect to potentially breakeven whether it's FY '23 or further out?

We haven't provided guidance in that regard. And as mentioned, I think we're fortunate now just with growth and contract backlog, we can pull levers now to get to that position as quickly as we wish and our balance sheet is strong. So it is very much on our minds, and it's in the Board's lens as well. So yes, there is an explicit guidance, but we're trending in that direction all the time.

Right. And just a few more questions. Employee expenses are up significantly on last year. Will this continue in the current year?

No, it's much more modest growth in terms of employee costs with all of these items. We really, if we go back 24 months at the start of the pandemic, we made a few decisions to try to get on the front foot. We made an acquisition. We did a capital raise. We didn't lay off any of our staff. I think the executive team and Board took pay cuts but no one else did. And we've really tried to build the business so that we could pop out of the pandemic as strongly as possible. And I think, by and large, it's been a good outcome, but we're quite close to being optimized in terms of some of our departments and our head count items.

Thanks. And just in terms of software development, can you give us some examples of increasing ARPU from these developments?

Yes. So we've continued to raise pricing through the last several years. And we don't do it based on inflation or anything like that. It's based on releasing more capability. And a recent example is bringing out a lot of analytics capabilities through dashboards and items that let our customers start to control NC project productivity. And alongside that, we've introduced additional subscription fees to access that kind of functionality. And so it's very much the same theme. The deeper we can go into these workflows for customers and the more productivity we can drive, the higher we can price the products. And so that's very much our model as we introduced new modules of software, and we raised pricing and behind that.

Thanks, Glenn. And momentum continued into Q1. Can you just give us some color on the first 2 months as to how the business is trading?

Well, I think close contracts have continued to run through very strongly through these first 8 weeks, and that's the key lead indicator. And yes, and the recognized revenue item through April was also strong and slightly ahead of plan. So we'll continue with our quarterly updates and make sure everyone in the market is getting full visibility into how revenue and margin close contracts are tracking, but our cadence is to do it every 90 days.

And just conscious of the spider takeover by [indiscernible], is that an outcome you would see? Or do you see more growth into the future.

In terms of an outcome for IKE, I mean there's been an enormous amount of -- all of a sudden, this space has become pretty heated in terms of M&A activity. And we're on a great trajectory. I think we're just looking to build a really great company with a long-term lens. I guess if you know those kind of M&A items were to come along. They just need to be assessed with the best interest of shareholders in mind, but there's nothing imminent at this stage.

Great. And just last question, Glenn. Could you please elaborate on the work that IKE has been undertaking in partnership with Pointerra.

Yes. So Pointerra, for those that don't know, Pointerra is a company based out in Perth, and we're so focusing on point cloud management for poles and also a bunch of other assets. So yes, we've been fortunate to work with Pointerra at the East Coast electric utility on a particular proof of concept. And that's gone well. So yes, we've enjoyed the partnership with Pointerra we're hoping at least to some bigger things.

Right. Thanks. That concludes the Q&A segment. I'll hand it back to you for closing remarks.

Thank you, Simon. Again, I appreciate everyone taking the time to join the call. I think we've covered all the key elements. And as mentioned, our next update will be after June 30 in terms of the Q1 update. But otherwise, thanks very much.