ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good morning, and welcome to ikeGPS' First Half of Financial Year 2023 Financial Results and Performance Update as released on the NZX and ASX yesterday. In the company today, we have the CEO, Glenn Milnes, who will go through the presentation up on the screen. Before I hand over to Glenn, I'll just remind you that we will take questions at the end of the presentation, which you can do so via the Q&A panel at the bottom of the screen. Glenn, I'll pass it over to you to get started. Thanks very much.

Thanks, Simon, and thanks, everyone, for taking the time to join this call. What I'll try to do is pulse through these slides, which have been released to the market already just to provide some more color and -- but work through them pretty quickly, so we can get to Q&A and discussion quickly. So it's been another really strong period for IKE overall from a P&L perspective. We delivered net profit of $1.1 million versus a loss in the prior calendar period of $6.2 million, we've got positive operating cash flow and just a lot of momentum in the business if we look at revenue gross margin growth. Our expense base increased modestly relative to sort of our high revenue and customer acquisition performance. Keeping in mind also that our -- most of our operating costs are in U.S. dollars. So while we get a benefit at the top line for a weakening into dollar, it also flows through to heightened operating expenses. And our balance sheet has continued to stay very strong, and it strengthened in the period. So more than $25 million of cash on the balance sheet and close to $4 million of trade and other receivables. So we're in a really strong spot and a very healthy position, both in terms of our operating structure, also in terms of our ability to look at acquisitions as they become better priced. From a revenue perspective, this was preannounced. Revenue grew to $15.5 million, so [ 170% ] higher than PCP. And keep in mind that our prior calendar period was also a strong growth period as well. But I think the key thing for our shareholders and investors is that close to 90% of our revenue mix now is coming from recurring subscription or reoccurring transaction sources. And that's a product of building software tools and capability that customers are prepared to pay for. This slide just kind of -- is a bit of a look in the rearview mirror in terms of FY '22 to March of this year was a really strong period for us. If you take out the COVID blip, you kind of see the way our revenue model and revenue mix has evolved positively over these last 3 or 4 years. Again, it's a consequence of the strategy to build more software products that customers are prepared to pay for. So we've kept increasing pricing, and we keep adding to the product portfolio. So the blue and the green bar represents subscription -- software subscription and software transaction revenue. The other chart that we've been reporting consistently is around the contract backlog and how it translates to revenue. So our contract backlog here is shown in orange each quarter and recognized revenue is in blue. It's a nuance to the way our signed contract backlog is now being recorded. We've got some of our larger customers now are just layering on transactions month over month over month. So it doesn't necessarily flow through to this quarterly reporting item. But you can see the momentum, and that's what gives us a lot of confidence in our view for the next half and the next 12 to 18 months. In transactions, a lot of the industry that we serve. So we're based here in North America, serving the communications and utility market. A lot of this industry does business on a transaction basis. So what that means is that every time an asset gets engineered through our software platform, we charge a transaction fee. And yes, it's the way that the industry operates in many cases. And it's a great indicator of utilization of our software. As we move forward, we see a really strong uptick in terms of transaction revenue growth, up more than 300% against PCP. In a table here, again, this is what we consistently report each quarter in terms of the economic engine of IKE. And just strong growth across all of these items, and we're working really hard at the moment in terms of introducing more technology internally to drive gross margin percent over time. So we're excited about some new capability that will continue to improve our gross margin profile from a percentage basis. So from here, I'm going to go really fast through these slides because I think a lot of the audience is familiar with many of these metrics. We're in the right place at the right time in terms of the North American electric utility and communications market. It's very definable, but it's a really large target customer base that we sell to and just some enormous macro market tailwinds driving our target customers to be more efficient and use technology in terms of building their distribution networks and maintaining their distribution networks. This chart here shows these are billions of dollars that shows the growing investment that's happening across distribution networks in terms of capital expenditure. Again, we help utilities to pull the network at a much higher quality standard and more efficiently. But this need is growing and it's going to continue to grow in terms of aging infrastructure, aging workforce, et cetera, more demands on the power grid coming, particularly with electric vehicles and some of those requirements. Ditto on the fiber communications side of the North American marketplace. So just an enormous amount of network development spend happening. We help these communications companies deploy the networks faster so they can get to market quicker and win underlying customers faster. And yes, just a huge tailwind probably right through to 2030 in terms of fiber and 5G network development. Some more detail here on the 3 customer groups that we sell to. They're all important in their own way. The electric utilities are the big prize if you take a 10-year view of our business. We sell the same products to each of these groups. We just have a different sales playbook and value proposition to each of them. Here's an image here, this is a distribution power pole that's failed in the storm. But this is a good visual view of what can go wrong if you don't design the network correctly. You can see the power assets at the top of this poll and further down, you can see all of the communications and fiber and cable TV, et cetera, connections, just a lot of load and a lot of engineering required to maintain these assets. And this is another visual cue of these 5G antennas, a lot of 5G and fiber is going on to power poles to distribution power poles. Again, we help this design process be a lot more efficient. But you can sort of see visually here what it looks like in terms of our design process and our maintenance process. So we speed this up quite dramatically versus historical work practices. Here it takes some patience and something of a sense of humor to be a new entrant and growth company in this space, but we're making really good progress now. We're winning about 1 new logo a week. And we've got some of the very biggest network groups in North America on our platform. And there -- the exciting thing is that they're growing. A lot of our revenue growth is from existing customers. It's not from new customer acquisition. These customers start small. And if you serve them well, they can grow, be very large. We've got lots of examples now of customers that have grown from $10,000 a year to $1 million plus. And that's part of the long-term opportunity. It does take time. But these are really large infrastructure businesses and we aim to build a decades-long relationship with all of these groups. And the growth opportunity is still significant. We've got less than 5% market share in terms of logos here in North America. So a huge amount of the market still to penetrate. We talked a bit about the opportunity to grow these big businesses over time in terms of account development. M&A is part of our strategy. So we've got an organic growth objective. And ultimately, although it's not in the near term, we've ultimately got quite a large international market expansion opportunity. I'll speed up even further as we go through team. The team, the most important part of who we are and what we do. I think the really key people at IKE is the mid-level group of -- and we've just got a whole range of emerging superstars that are expert in network development, network deployment and technology tied to this item. And these folks are really the face to the customer. So IKE -- we're really proud of the people that are growing and building capability within the business today. We have a team of about 92 or 93 people today, revenue per employee of about $350,000 per employee, which is trending to be top-decile type metrics. But these folks really matter in terms of how we're building the company. We're in market in Colorado, headquarter in Colorado. Again, we've got a team of a leadership team that are really experienced in terms of the electric utility market and helping our customers be successful. Ideally with our Board, we're very fortunate as a relatively small company to have a fabulous Board of -- with public company experience, but also with industry experience here in the United States. And I think most people on the call are familiar with the folks from a direct perspective. And from a technology and solutions perspective. This is obviously where the rubber meets the road, we've invested, and we're continuing to invest on an outsized basis in technology and product development because we've got a pretty incredible customer council now that are helping us build products and features that we know this market will buy, and will continue to pay for. And so we've got our 4 solutions, which we'll go into some detail. In all cases, our customers are paying a backbone subscription fee to access any of our solutions, and then they're paying a usage-based accelerator. So it's either transactions or it might be subscription licenses for back-office software use. And that's the model that we're driving customers towards as quickly as we can. And as we release new products and new features, we continue to increase pricing. A bit of detail there on our history. I think importantly, again, a recap, we've got 3 strategic swim lanes. So as we're building IKE, we've got a lens into the next 12 quarters and some important milestones across each of these 3 swim lanes. The first is being the very best of applying data collection technologies to distribution assets and asset decision making. The second is around analysis and insights, again, very specific to distribution assets and technology. And the third is around customer experience and becoming a partner that our customers can't imagine living without. And so we have -- and that can encompass not just UX and CX of our products, but also our business models, M&A and those types of items. And so that's really the summary of how we're building the company. I'll pulse through this super quick because I think, again, many of you are familiar with this. IKE Office Pro is the core revenue and profit generator for the business today, digitizes and standardize the way that our customers can go and collect and analyze distribution pole information to cloud software to do a lot of this analysis, and we're driving more and more automation and efficiency into this product. Just a view here is what a customer sees, it's very detailed, specific to utility or communications companies network. And some really interesting intelligence now in terms of dashboards so that if you're AT&T or Crown Castle or someone with a big national network footprint, you can start to understand how are we going in terms of network engineering efficiency across the country, but we can drill right into how efficient is a specific engineer in the field on Tuesday, et cetera. So there's some really interesting intelligence coming to the platform through dashboards. And we can put our hand on our heart and sell this solution based on productivity benefits for our customers. We just deliver dramatic outcomes for our customer base, and this is what we sell to. IKE Structural is really important. It's taking -- if you look at the photographs on the left, is taking those IKE Office Pro digitized records turning them into 3 models for pole loading analysis and design of networks. So we're 1 of the 4 standards in North America for pole loading analysis. And it's a very privileged position to access customers to go straight into their standards groups into the other cross-sell our other products and services. Some examples here of what the product looks like in practice. And we've got -- we're excited about our next-generation performance solution, which has come to market early next year. The great part of this is we've built this platform with a customer council that includes these groups, which are some of the very biggest network owners in the United States. IKE Insight gives us the ability. It's another product that integrates into the former 2, but that can be acquired by a customer stand-alone. It gives us the ability to process data from any source and apply insights to distribution assets and distribution poles. So it can drive some dramatic productivity improvements and automation capability into a lot of these distribution pole projects. So we're excited about where Insight sits today, and there's some examples here of how it looks in practice. IKE Analyze is our fourth product offering, it's where customers use our technology. They send IKE back their network information into the cloud. And then we use software and we use people to process that information and send them back an engineering output depending on what they require. And so that gives -- in a marketplace where there's just an acute shortage of engineering talent and engineering and resourcing, we can start to use technology to give our customers a lot more capacity. And so the demand for IKE Analyze, we think will just continue to grow and grow as we look forward and Analyze has been a key part of our revenue growth over the last 12 to 18 months. So I will pause there and I went through a lot quite quickly. But Simon, if there are questions, be happy to check through those.

[Operator Instructions] First question, Glenn, can you just talk to us about how many new customers do you believe there may be in the U.S.?

Well, there's about 6,000 participants in this market. If you look across the electric utilities it's about 3,200. There's probably 200 communications groups deploying fiber and building 5G networks, and there are about 2,500 or 3,000 engineering companies that do work on behalf of those infrastructure owners. So we've got 365 customers today. Our retention rate is really strong. So we're obviously still very early in terms of the addressable market. There's 5,500 that we haven't yet closed. But the seductive part of this industry is we know exactly who these customers are, and we know the roles of or the titles of the people that we need to be speaking to. We've got quite a good value proposition. And that's the way we run our sales playbook.

Thanks, Glenn. How have you seen the M&A environment evolve over the past 6 months in terms of opportunity and multiples?

I think that in the private markets, valuation multiples haven't come back to the same extent that we've seen in the public markets. I think since maybe the last year, technology multiples have been hammered in the public markets. Our view we're going to be exactly wrong, but our sort of approximate view is there's going to be a lot of pressure in the private markets for loss-making technology companies probably in 6 months' time. I think it's going to be very difficult for them to raise capital. And we hope that will present some good opportunities price-wise for the M&A.

In terms of the number of transactions or revenue across the platform, how much more will you need? Will the next-gen pole operating system product be able to process?

Well, we're building capability where we don't see volume being a constraint. So fingers crossed. If we get some of this automation technology right, and that's what we're working very hard on at the moment, we've got a really great software development group working on this. You can run very high volume through technology. So we don't necessarily see that being a constraint.

And Glenn, can you talk through the competitive software landscape. Are others offering similar solutions or looking to mirror your functionality?

It's a mix. I spent a bit of time talking about the swim lane slide, and that's very important in terms of how IKE differentiates or how we intend to differentiate from what anyone else is doing in this landscape. So -- but if you look at our 4 products today, we've got different competitors across those different product offerings. And so if you look at IKE Structural, we have power line systems, PLS and SPIDACalc, they've both been acquired by Bentley over the last 12 to 18 months. So they sit under the Bentley umbrella. And then there's another group called O-Calc, which is owned by Osmose, which is a big national engineering group. And so there's essentially 4 players in that space, including ourselves. We think there's an opportunity to do the next generation platform to differentiate from those groups. And it kind of goes on from there. There are -- the main thing that we compete against is incumbent engineering work practices. Our customers, they're so good at what they do, and they've been running power networks for a long period of time. They're very smart people, but they do use quite manual work practices. I think the exciting thing is particularly because of aging workforce and a real choke point around engineering talent to keep doing work the way that they have been doing, a lot of our customers have been forced to look at technology and efficiency and some of these items that we focus on.

Thanks, Glenn. That concludes the Q&A segment. I might just hand it back to you for closing remarks.

Thanks, Simon. So that was a brief description and plan but, again, I appreciate everyone's time and engagement, and I'd be happy to pick up any further direct question, either through Simon and myself, our emails are attached to the recent releases. So thank you.

Thanks, Glenn. Thanks all for joining.