ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good morning or good afternoon for those in the afternoon. Welcome to ikeGPS' Fourth Quarter and FY '23 performance update that was released to the market this morning. From the company today, we have the CEO, Glenn Milnes, and I'll pass it over to Glenn shortly. [Operator Instructions] Glenn, I'll hand it over to you to get started. Thanks very much.

Thank you, Simon, and thank you to everyone for taking the time to join and get an update. So what I would like to do is pull through some headline slides quite quickly and leave plenty of time for Q&A and discussion rather than going through it, it's a relatively long slide presentation, but I think many people are familiar with aspects of this item. So please take note of this important notice. As mentioned, I will run through the ikeGPS update and then really focusing on some of the investment items that we have focused on through the last 12 months and why we think it matters. So at a glance, we've had another very strong year, substantially above our stretch targets internally and above some -- the upgraded analyst consensus view. So close to $31 million of revenue, up from $16 million last year. We're now close to 90% of our revenue base coming from recurring and reoccurring sources. Gross margin grew 66% to $16.5 million. Our gross margin percent is 53% today, but we have some real opportunities that we'll talk to further in terms of automation technology, which is a big investment area for our business, and we've kept the balance sheet very strong and healthy with over $23 million of cash and receivables, and that's split about $80 million of cash and $5.2 million of receivables. And as you all know, we're chasing a really large market here and just getting started. So again, many of you would have seen the release material, but revenues kept growing very strongly. If you look back to where we were FY '20 when COVID hit. As we are flipping the business to software, recurring subscriptions, reoccurring transaction, business model has continued to grow very strongly. And it's really the result of the investments that we've been making into products and technology and also a business model and sales model that resonates with our market. This is another snapshot into the revenue item. And note that we released our audited financial statements at the end of May, where we go below the gross margin line to look at EBITDA and profitability, et cetera. We've controlled our OpEx, I think, quite strongly through this year as well. But just seeing this dramatic growth of revenue and demand from a transaction perspective. We processed close to 0.5 million distribution assets here in North America on a high platform under this transaction model, and it's kicked up very strongly in terms of revenue profile to north of $18 million this year. And I won't read through the key metrics table, but I mean this is the economic engine of IKE so that these are the things that ring the cash register and that we focus on. And we'll talk a bit more about the number of enterprise customers because we're still at 5% to 6% penetration in terms of the number of addressable enterprise customers, but we're adding about 1 enterprise customer a week at the moment and an opportunity to go faster as we look at FY '24 and beyond. So what I thought would be most useful in terms of this group and decision is to try to pull out the really key slides that were in the release that was made available earlier today. And I think a bunch of you are familiar with. But I think these things are really important contexture items with a shareholder and investor lens. So starting with the market and our investment in the market. I think what's really interesting in terms of momentum through this year has seen how quickly an additional tailwind has emerged across the North American landscape, particularly in the United States. And we've always talked about more than 3,000 electric utilities, a huge tailwind in terms of fiber and 5G investments, in terms of the U.S. in particular. And this will run for another 3 to 4 to 5 years, we think at least. And a large number, more than 1,000 engineering companies that are doing this work on behalf of these infrastructure groups. The thing that's changed quite quickly has been the view of the electric utilities and their requirement over the next 30 years to move from having 20% of the energy in the United States on the electrical grid, moving to perhaps 50% of energy sitting on the electrical distribution grid by 2020, and that is in order to meet carbon net zero targets and also to power a whole new asset class. It's not just homes and businesses, it's now the electric vehicle market. And what it means is that there's just an enormous requirement to add capacity and stability to the distribution network. And that's where I place. I think being in the right place at the right time is certainly the most important factor in terms of building a growth company. And we just help this design and engineering process from an electric utility and a communications business perspective. I think the second thing I did wish to highlight in terms of where IKE has been investing over the last 12 months has been around 2 things. Systems efficiency and also brand. And there's a very good rationale behind why we're investing in these items. So systems efficiency, if you get it right, it translates to scalability and very strong revenue per employee and profitability outcomes. It's really being able to grow and scale without having an associated or linear headcount cost requirement in the business. And so through this last 12 months, we've implemented -- this is unglamorous stuff, but it's really important. We've implemented a new finance system. Sage Intacct that gives us real scalability. We've put in place a marketing automation system called Marketo lets us turn the handle really efficiently in terms of our marketing and lead generation campaigns. We've enhanced our customer relationship management system called Salesforce, again, lets us really manage the customer experience in a highly effective way. We invested substantially to become software compliant and this translates to having best-in-class cybersecurity I think, as importantly, it lets us have really efficient engagement with our customers in the sales process, IT departments now just tick the fact that we are software compliant. We put an HR system upgrade in place and also training and development platform. And so it's really making sure we've got the systems and the process to go from where we are today as a $30 million business to where we aspire to be, $100 million plus over the next several years. The second thing that we've invested in, which is less visible is probably around brand and customer experience, and that translates to pricing power. So by delivering a great customer experience and inherently a great brand, you're able to maintain an increase pricing. And so that's been a huge effort for us. And there are some examples of the types of programs that we've launched through the year, and they're very meaningful for our customers. So one is IKE Wire, which is a thought leadership program for pole engineering and structural analysis. We launched a store where customers can come in and access our products and services and merchandise and other things, seamlessly. A training platform called IKE University and also an employer brand system, which helps us with attracting talent and retaining talent. And so the benefit of doing these things well is how it flows through to ultimately to price and maintaining and building price increases over time, but also how customers perceive us through either product Net Promoter Scores or employee Net Promoter Scores. And these things all kind of work together in terms of building the brand from the inside out. So again, much less glamorous items, but really important as we continue to scale the company from about 100 people today to a larger business over the next few years. I think the other items I wanted to focus in on is when we look at our P&L, you'll see that we are investing very substantially in product and technology investment. And the reason for that is that we're still small, we're still early in terms of penetrating the market. But we've got a very good view into what our customers require. And we believe building best-in-class technology and products will entrench us in these customers, hopefully, for decades and decades, to come. So one of the big investments we've made is to what we call the next-generation performing product. So that's like structural. There's a -- there's an image here of what the next-generation products can start to look like for a customer. We've built it. We set the requirements of the product with a pretty amazing customer council and not just with mid-level people in these businesses, but with the standard group leaders within these businesses. And I think one of the really exciting things for us is the early reception that we've had from customers to what this product can do. We think it can be quite disruptive versus competition. And there's a note now released that we just flipped 1 of the top 5 electric utilities operating on the East Coast from an incumbent provider to this next-generation performing business. Starting 100 licenses for 3 years, and we think they can grow really strongly. So we're excited about bringing this to market through FY '24. The other product and technology investment that we have made -- Initially, we did an acquisition, a small acquisition of a technology play called Visual Globe. But we've been working on building AI and automation specific to power poles and distribution assets. Again, AI is a very high term at the moment, generative AI. We'll be working on generative AI for poles for the last 2 years. And again, we're getting some very interesting proof points here. At the moment, we're just coming to market with 1 of the world's largest digital data collection companies as their pole or distribution asset partner. And this is truly exciting because it leads us access data at real scale and potentially bring some quite disruptive automated capability into the North American market. So again, none of these product and technology investments happen as quick as we would all like them to. But the things that we have been investing and we feel very optimistic around in terms of where we're at from a proof point perspective. The next item is really around sales infrastructure and our confidence in being able to grow our existing customer footprint in terms of sales and also about to win new logos. But this is where IKE has matured significantly over the last 1 to 2 years. We have a tremendous sales leader, and we now have a real depth of sales capability. We go to market directly here in the U.S., we service our customers directly with solutions, engineering presales and post-sales engineering to make sure they're successful. And having this kind of scalability for us is very important. And again, that's where we've been investing ahead of the revenue curve, even though the sales team is actually super-efficient in terms of quieter attainment and growth. And the last item is really around our investment more broadly in people. And we try to position IKE as an accelerator for folks that are dedicated to this electric utility and communications market in North America. And the really exciting thing is our retention level and our ability to attract talent is very strong. We're different to a lot of technology businesses that would list attracting talent as the greatest treat to their growth profile. I think we're lucky to have the ability to get great people out of this industry and we've just got a lot of examples now around how folks have come into the business and have just stepped up and up to become the most important people in terms of customer-facing resources in the company. So we do have a really great team centered here in Colorado, which is where I am. And it gives us a really good platform to keep building from. So what I will do from here because there are another 30 odd slides, but they're all able to be read and I think, interpreted remotely without being talked to. But I'll just bounce through some of these slides. I think the market momentum item is super important. And you can just see here these are billions of dollars in terms of investment and utilities across the United States is going to grow and grow, which means we're in the right place at the right time. It's the same. It's still a bit counterintuitive, but there's more and more and more investment going into fiber and 5G project. Again, we help productivity in terms of these companies getting their networks deployed. And we're building products and value propositions to meet the requirements of each of these customer groups. Again, I'm going to go fast just so we can have time for discussion. Some example here of a failed distribution power pole, we designed these assets, not this one, hopefully. But we help to make this network a whole lot more resilient and to make sure we meet the engineering and regulatory and legal standards. These are 5G antennas attached to a power pole, we help communications companies get their fiber and their 5G antennas deployed faster and at a digital standard. We do have some of the best Tier-1 customers in North America, but we've got a long way to go in terms of continuing to extend. So by no means have we done all we can here, we've got about 6% market penetration in terms of logos. So a lot of work to do to keep expanding the footprint. But you'll see we grew close to 100% this year, we added 20% more logos. And so you can kind of see the way that customers grow over time versus the necessity to be adding new customers in terms of our growth -- revenue growth performance. And we'll grow through multiple avenues. It's -- we're adding sales teams, we're going to add new logos, we'll continue to cross-sell and upsell and to customers. We believe we will continue to look at acquisitions. And ultimately, there's a pretty significant international market expansion opportunities for the time being, we're very focused here on the North American market because it's just so large. We've talked through the team. Again, we're fortunate to have a great and very stable leadership team with subject matter expertise. I won't talk through each individual. Indeed our board with 4 of our directors based here in North America and 2 based in New Zealand, the folks that are all like directly out of the space. And I'll really speed up as we go through here. Our website is a great resource in terms of looking at our products and our capability and customer testimonials and those types of things. But we have a full stack of products and solutions driving productivity for distribution network deployment and maintenance with tech-enabled services sitting underneath because just a massive demand. I think over the next 10 to 20 years, will be a lack of people to do this work, and we're looking to replace that with automation and with some subject matter expertise. Every customer pays a subscription on top of that additive, they'll pay a usage fee. That will either be more licenses and software fees or it will be more transactions. Different parts of the market operate on different business models. And so it's really important that we're conversant with how the industry does business. And so we have those 2 different usage multipliers in terms of our business model. And then we offer these optional value-added products like IKE Analyze and IKE University and a lot of other training and subject matter expertise, which is more about being a sales lever than being a profit center, although we make money from all of those items. We're seeking to create long-term differentiation. So the best companies that have been grown and built based on differentiation, I'm trying to be just better at doing the same thing. So we have our 3 swimlanes which are quite technical in terms of where we are seeking to just be the very best in our industry. So we're a pole company. We do distribution assets, and we're aiming to do it the best of anyone on the planet. Again, I'll just go fast through -- there's some views here into our products. You get some views into what it looks like if you were logging in to software. But digitizing all of this asset information, believe it or not, many, many utilities and comps companies do not have digitized records, but this is making it really easy for them to get to digital twins and then driving productivity, be it safety or speed or cost savings, all of those items. PoleForemann we touched on. We're really excited about what's coming with the Next-Generation PoleForemann and a very privileged to have 5 of the 10 largest utilities in the U.S. help us design this product in terms of features. And I again say earlier stage, artificial intelligence, automation. This is the future of the industry. There are enough people to do all this engineering over the next 10, 20, 30 years, and we're looking to help the way utilities can do some of these things much faster. So huge potential, still much higher risk in terms of where we're at from a stage perspective, but some really interesting applications. And so I will pause there, Simon, and happy to discuss questions.

[Operator Instructions] First question, Glenn, could you please advise us how the U.S. dollar cash position has changed between Q4 and Q3 and New Zealand dollar amount is affected by the expense rate?

It's been -- I think it's been relatively flat through Q3, we were negatively impacted. And the context of that question, is we're a U.S.-centered business in terms of our operation. And we've raised money in both -- raised capital in both Australia and New Zealand, to hold some capital there. But every quarter, we have to revalue all of our cash to NZD because that's the currency that we report in, so we are subject to those FX ups and downs. I think, Simon, by the end of the year, it will be a relatively immaterial impact from start of the year to end of the year.

Okay. Thanks, Glenn. In your outlook statement, you implied some seasonality in transaction revenue due to the practices of some of your large customers. Can you provide a further explanation as to what drives this variation, i.e. how do they phase different activities through the year and how it relates to the usage of the IT platform.

Yes, it's a good question. Well, there's 2 parts. So seasonality, yes, there is because for our business, we support people that are building and maintaining outside power networks and communication networks that are above ground. So when there are these big storm events, folks cannot get outside and do engineering. And so that slows down activity, which impacts us. I mean, sadly, climate change just means these networks need to be hardened more quickly and more robustly, and that's something that ultimately will be a tailwind for us. And then the second part of that question, Simon, I think, in our update today, we talked about some transaction revenue slowing down -- potentially slowing down through this first quarter of FY '24. That context is different. So we support a range of national communications companies that are building fiber in different markets, and they're all in a race to build a fiber network in a city and then switch on the network and win customers. And coincidentally, a couple of these big national groups that we support on every project that they do, they're both in territories where the utility that has to approve their fiber network attachment have relatively old fashioned engineering standards in terms of how they will approve data. And we, as a digital standard don't fit those particular requirements in Kansas and another state. So it may just mean these groups are going to ultimately go to many, many other markets through the year. So we may just see things slowdown from a recognized revenue standpoint.

Can you just talk Q4 contract wins? What did that look like in terms of numbers? And what not?

Well, per the release, I think, for us, the contract win item -- if we went back 2 years ago, we were keen to ensure investors and shareholders could have a good lens and to demand that was coming through the funnel. And as some of these really large businesses have matured with us, they're no longer placing like long-term forecast contract orders in terms of volumes. We're working with them weekly or monthly, and they're just consuming the product or transactions, and we bill them at the end of the month rather than receive transaction. So the -- I mean, the summary is that we feel very confident in terms of a strong growth year ahead of us, but we're not going to continue to report that contracted revenue piece because we just think it may mislead and this is -- or not be particularly helpful, just given the sort of the maturity of the business model.

Excellent. And can you talk more with more detail on the development within IKE Analyze or of your AI capability, i.e., an improvement customers will see and the time frames for when and how this could assist your own gross margins. Glenn, can you comment on AI impacts across the industry as you serve?

It's been a big focus for us as I talked to in one of those slides. So we see a very substantial opportunity to automate the use of bulk data, bulk imagery through partnerships with the very largest groups that are collecting imagery information that includes poles and infrastructure. And we do think that can change the game about how any of these businesses think about network maintenance, network vulnerability, joint use. How you plan a fiber network, where you can attach overhead or where you may have to think about going underground. So we're working diligently on that application. And then secondarily, when our customers have gone and captured data themselves, how do we automate that initial assessment process. And we've made some really interesting strides in terms of replacing a person with a computer to see -- very power network specific components and things. So yes, we're -- I mean automation is the future of this whole opportunity. So it's somewhere that we're focused very hard on.

Can you expand on the comment winning 1 new customer per week? How will that play into FY '24? And how does it compare to, say, 6 to 12 months ago?

It's been quite a steady run rate in terms of wins. But the context is -- I talked a bit about the sales infrastructure investment we're making. We don't go after any customer, they're not all the same. I mean, so we look at the communications market, and we've got a team focused there and you start at the top, who's investing the most in terms of -- by the network rollout and you work your way down, same with the electric utilities. I mean we're going after very largest because we know if we can win those and do a good job serving them that we'll keep them. So they're certainly not all worth the same. And we're in a position now where a lot of the smaller customer wins, there are people that are coming to us because of brand and reputation. And then we've got a very purposeful sales strategy and to the very largest groups.

Thanks, Glenn. What's the outlook for equipment sales, which was faltering in Q4?

So for us, equipment and services, so that would be training, it's onetime revenue. We use that as a gateway to sell the software and to lock customers in. I think it's -- we don't see any change in demand. I think the thing on the hardware side of things will be what price point we need to be at, to get customers to make an easier decision. And again, sitting behind that means that you're subscribing to the platform you're subscribing to usage, subscribing to licensees, softwares, et cetera. So it's an interesting item that we're working very hard to be able to ingest data that comes from anywhere, be it a smartphone or a Google Street View car or a drone and having the capability to process that and the software.

And will all customers go into the new product being rolled through the 5 utilities?

Eventually, yes, I believe so. I mean the -- we've got about 115 enterprise customers on that Fifth-Generation PoleForemann product. I believe all of them will slip over but this is the electric utility market. And so folks take time and if something is working well for them, they don't necessarily just pole to the next thing. But we'll respect their use of the current product, of course. But at some point, you turn support for the legacy product, and it's a driver for everyone to pop over. I think one of the -- and Simon, just adding, I mean, one of the really interesting sort of sticky items around PoleForemann structural analysis software is these customers have trained all of their staff and all of their team, all of their field engineers on how to use a particular package. So the switching costs are really high. So being able to move folks into the same workflow, same work environment, but the next-generation software makes it a relatively straightforward item.