ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good afternoon, and welcome to ikeGPS' investor webinar to discuss the company's performance update for the quarter ending 31 December 2022. On today's webinar, we have CEO, Glenn Milnes, who will go through the presentation posted on ASX and NZX. To post a question, please submit them by the Q&A button at the bottom of the screen. We'll do our best to get through as many of them as possible. I'll now hand it over to Glenn.

Thanks, [ Ben ]. And thanks, everyone, for taking the time to hear the update. At the highest level, Q3 was another really solid period for our business. We just continue to grow in terms of capability, and obviously, revenue is growing really strongly. Feel very well positioned as we go into Q4 of this year. So what I'd like to do is pull through these slides quickly. I know a lot of you are familiar with IKE and the story, and then leave enough time for Q&A at the end. So from a revenue perspective, we're at $23.3 million in the 9 months to December, so 134% up on last year. And remember, last year was a big growth year as well, so good momentum. And I think the key thing for investors is to look at the green and the blue part of this chart, which is subscription and transaction revenue, which is recurring and reoccurring revenue from our customers. So it's much higher quality, it's much more predictable, continues to grow strongly. And it's because we've built more software capability, and the platform is sticky for our core customers. Most of this growth is coming from existing customers, so logos that we won 2 years ago or 3 years ago in the groups that keep growing and growing, which is a positive thing. The orange bar in this chart represents closed contracts and the blue bar represents revenue. We have some seasonality in our business because of storms, winter storms, and actually, this year, with flooding in California, can slow down engineering activity. But overall, the trend here is strong. So I think we're very well positioned in terms of Q4 outlook and now starting to cover some of FY '24 in terms of momentum. Similarly, this chart shows transaction revenue, that's the green bar. So in the 9 months to date, just over $14 million of revenue from transaction sources. So remember, our customers -- when we sign up a customer, they pay us a base subscription fee, and then as they use the platform, they pay us a transaction charge or a transaction fee that sits over the top of that. And it's the way the whole industry operates here in the United States. So we have to be conversant with that. So transaction revenue is a really important driver of growth. And you can see hundreds of thousands of engineering transactions happening on the IKE platform and driving a lot of that revenue growth that we looked at previously. And this table was in the release that folks are able to look at, but just solid growth across the core things that we focus on as a business. I think if you come down to the platform subscription segment, number of enterprise customers keeps growing. But we still have around 5% market share in terms of number of customers. So a really big opportunity in front of us not just to keep building inside the businesses that we serve today but also to add more logos over time. This is where I'll really accelerate in terms of the presentation but be happy to cover questions and comments here on this call or afterwards. The market opportunity is just getting larger and it's good luck as much as good management. The -- even climate change perversely is a big tailwind for the IKE business. We just help these groups strengthen the networks and build the networks faster. All this [ storm ] of activity has just increased demand on the electric utility side and the fiber market and 5G small cell deployment side of things is just intensifying. It's certainly not slowing down. We don't expect it to do so. And again, we just help these customers be much more productive in terms of the process to assess and build the network. And you can see in some of these charts, this is CapEx spend for the electric utility market, hundreds of billions of dollars going into designing and building distribution networks. Similarly, the broadband market, the fiber market is just growing in terms of the level of investment. Most of these networks are going overhead on to power poles. And again, that's what we help design and help build faster from a fiber market perspective. So good -- great macro market tailwinds. There's just some more detail here around all of the drivers for electric utilities around aging infrastructure, fiber attachments. They've got to power the electric vehicle market, an enormous shift of energy going into the distribution network away from historical energy sources for vehicles. And we mentioned the communications' macro drivers. Again, this is a 5-year plus macro market tailwind. A lot of the infrastructure going into overhead networks. And we help speed up the process for these groups to get to market faster and sign up the underlying customers and subscribers. And we are continuing to add new and important customers. There's some really interesting new electric utility customers that we believe will close through this quarter and the next quarter. And it matters a lot because these are groups that we signed up some years ago that are now starting to really get to scale. So tracking that number of customer logos is an important leading indicator for us. Take a long-term view. We've got multiple growth avenues. One is around adding new customers, as we just talked about. A lot of our growth at the moment is coming from upselling and cross-selling into existing customers. Again, our goal is to create decades-long relationships with the groups that we serve. We've executed 2 M&A transactions in terms of inorganic growth and continue to look for well-priced, high-value opportunities for acquisitions. And then although it's not in our near-term plan, the international market opportunity is very significant as well. But for the time being, we're very focused here on North America, given that we're still a relatively small company ourselves. We've got a great team. They're all experts around poles and pole infrastructure and the electric utility infrastructure, some really brilliant young people that are going to go a long way in this industry. We're lucky to have the team that we do. We have very low churn in terms of employees. So fortunate to have a great group that -- and a bunch of people that are just coming up through the business and moving from junior roles to now very senior customer-facing roles. Indeed with the leadership team, always trying to optimize our leadership group. But again, a lot of expertise in the North American electric utility market and a lot of expertise in technology. This is a really niche area that we focus on, but the folks we have on the team really understand this industry and its challenges. And it flows right up to the Board. So again, we're fortunate to have a very strong Board of Directors with end market expertise and also expertise in growth, public and technology businesses. I'll go even faster now through our products, but this is obviously where the rubber meets the road, we've got 4 products essentially. Our business model, every customer pays a baseline recurring subscription to access any of our products, they pay additive fees based on usage. And we offer optional value-added products such as IKE Analyze, which is where a customer, they collect the data using our technology. They're sending it back to us into the cloud. We use a lot of technology to process it and then we send them back an engineering product. That's the IKE Analyze business model. So we've got these 3 layers of revenue generation. Some imagery here of IKE Office Pro, the photograph down on the lower left of the screen is there's a poll in our IKE Office software where the field has only had to take a single photograph in the field and someone in the back office can do all of that analysis and interpretation. The photograph just above it are some of our dashboards, we can show -- in this case, AT&T, all of the network projects are performing right down to the productivity of every single engineer that's working on a product. And so it's around a big value proposition is around digitizing assets. It's surprising how few utilities have had digitized records of the assets they own, the infrastructure they own. And ultimately, this is around automation and integration, aging workforce, just enormous work demands, and we help sort of bring part of this process into a very modern context and a very modern CX or customer experience and push things through to items like pole-loading analysis, which is a really time-consuming process today for many customers. Second product is PoleForeman, it's part of the IKE structural product set. It's taking -- if you look at the left, it's taking IKE Office, digitized data, and it's turning it into a CAD model so that you can design attachments and design your network, understand if you're meeting compliance, meeting your own engineering standards and ESC safety codes. So this is the flow-on product. It's used by 5 of the top 10 electric utilities in North America. Some examples there of its capability. Also, an example of the customer council that we have helping us work on the next-generation product, which we're excited about. So that will be released soon in 2023, and we think that's going to potentially have a disruptive effect on the pole-loading market. Lastly, as IKE Insight. So this is applying its applying artificial intelligence and machine learning to analyzing these structures. Again, an engineered utility might cost $100 an hour to be doing work in the back office, and there's opportunities to be automating these items, and that's what we're working on with IKE Insight. This is a complicated slide, but we can take data from any source and process certain get insights and decision-making data from any data source relative to a pole asset. And some examples here of how it works in terms of putting the machine over top of this raw data to deliver some outcomes. And I'll accelerate through Analyze, which we have talked about. And I'll pause there, [ Ben ], for questions.

Thanks, Glenn. Just a reminder, if you'd like to ask a question, please do so by the Q&A button at the bottom of the screen. So the first one. Well done on the improvements in closed contracts. Can you talk us through the lead times you're getting from customers? And you've mentioned fourth quarter '23 could also be strong.

Yes. So the lead times continue to shorten, and we're working so closely now with groups that it's almost a rolling contract basis. Whereas historically, some of these communications groups were saying -- they're coming at us to saying, "Hey, we've got 9 months of -- or 12 months of work ahead of us," and they're placing a larger contract. Now we're working very closely with groups. And so the recurring revenue piece of things is flowing month-to-month. So that's a positive item. We're finding that the engineering companies, we sell to 3 different -- 3 distinct groups. The utilities themselves, they are quite slow to make decisions. The communications groups can be faster, but they still are very deliberate, like Crown Castle or AT&T. But the engineering groups now are going pretty fast. If there are allocated contracts, they will order. The sales cycle is -- can be very short, less than a week from engagement. So that's really the way it splits out.

Thanks, Glenn. This question. Gross margin of 53% for the 9 months, which is steady with what you reported at the first half, however, a bit lower than previous years. How do you see the gross margin moving forward?

So the item to keep in mind on the gross margin percent is the transaction revenue for us has just exploded in terms of growth. It's up 250%. And the nature of some of that business is a customer will collect the data, they'll send it back to IKE, and we'll process it through our software, and then we'll send them back in engineering deliverable on engineering outcomes so they can get on with building their network. Some of that process requires people, and all of those people costs go into the gross margin line. And we're working through the Insight product on automating a lot of that work. So at the moment, it's -- I mean, it's highly profitable, high-growth business. But it does impact that overall gross margin profile. And that's the item that we're investing in, in terms of automation so that we take people out of the equation and replace them with software.

Thanks, Glenn. Next question. In subscription sales, there was a material uplift in sales per clients. Did you raise prices, and just noting that there was a large uplift in sales that clients remained relatively flat?

In Q3, we didn't raise -- we've consistently raised prices over the last 3 years. Every time we release new capability, we raise price. But not in Q3, this has been -- Q2 and Q3 has just been usage, so more customers, putting more subscribers on.

Thanks, Glenn. How much of the $5.1 million cash burn in the quarter is due to a weakening U.S. dollar to the kiwi from October to December?

It's very significant. So again, the context here is IKE holds cash in U.S. dollars, which is our operating -- it's where we operate, and Australian dollars, which is where we raise capital or have raised capital historically. And so the FX rate, we have to convert it to New Zealand dollars for reporting purposes each period. So it does have a very significant effect in the currency. The New Zealand dollar strengthened significantly through Q3. I'm not sure exactly what the number was, but it's the majority of their difference is FX.

Thanks, Glenn. Can we please get more insights on the pipeline for new logo wins like there's quite a large utilities in North America kind of win any of the other 5?

Yes. I mean we run 3 different sales groups and 3 sales campaigns. And one of them is the utility sales campaign, and it's reasonably straightforward and there's 3,000 electric utilities. You just -- you can see who's the biggest and who's spending the most on distribution and work your way down. And that's entirely what that group is focused on is winning. Now we've got #1, #3 and #5, so we're focusing on #2 and #4 and down that list. So it's -- it requires some patience. But we've seen with groups like Exelon and Southern Company that if you do get through the [indiscernible], then that can really open up over time. So that's a key focus for our sales and marketing organization.

Can you help us understand the upside from [ product ] structural? Is there any ability to raise prices for this product?