ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good morning and welcome to ikeGPS' Full Year Financial Year 2023 results presentation released on the ASX and NZX last night. In the company we have CEO, Glenn Milnes, who I'll hand it over to you shortly. But before I do so, Glenn will somewhat speed through the presentation up on the screen before we get to Q&A, which you can submit through the Q&A panel down the bottom of the screen. But Glenn, I will hand it over to you. Thanks very much.

Thanks, Simon, and thanks, everyone, for taking the time for this update call. As Simon mentioned, I'll run through our slide material reasonably quickly and efficiently and leave plenty of time for questions and discussions. So yes, my name is Glenn Milnes. I'm the CEO and Managing Director of IKE based in Colorado, the United States, which is our center of gravity of operation. We're, IKE, the Polar West company. So we build software products that speed up the deployment of electric utility networks and communication networks and also help with digital transformation of those assets. So I will work through these slides, please take note of this important notice. At a glance, FY '23 was a very strong year for us, again, coming off a previously strong growth year, and revenue grew to just under $31 million, which is 93% up on the prior year and quite significantly ahead of even the stretched targets we had in place at the beginning of the year. Importantly for investors, nearly 90% of our revenue is now derived from recurring subscription or reoccurring transaction revenue sources, which really helps with quality and predictability as we keep growing. About 380 enterprise customers in North America. It's less than 6% of the addressable market. So we're still early in terms of market penetration. Gross margin grew strongly. Gross margin percent was 53%, which is down from 62% in the prior year. The reason for that was product mix and real outperformance in terms of our IKE analyzed transaction revenue, which we can talk to further. Our balance sheet remains very strong with $23 million of cash and receivables on the balance sheet and EBITDA losses shrink to around $2 million for the year. So these slides are some repetition here from our performance update at the beginning of May. This chart shows absolute revenue growth over the past 3 years. The key revenue components of the green and the blue bit, which is reoccurring transaction and subscription revenue, which is the blue. This is a consequence of the investment we've made into software products and capability, and we expect this kind of relative mix to continue with growth across both of those categories. This chart details revenue, gross margin in orange and EBITDA in green, and that's trended well. We've continued to invest particularly substantially into product and technology development, but our EBITDA loss shrank to around $2 million and sort of showing that continued improvement trend. This is the table again that we had released in the performance update, but just going down, these are the really key metrics in terms of IKE's economic engine. And we've had good solid growth across all the key things that drive our business in terms of number of transactions, associated revenue number of customers. We're winning about 1 customer a week across the North American market at the moment and you see really healthy growth in terms of the subscription revenue piece also. As a snapshot here of our P&L and to follow our balance sheet. Also, you see a loss for the year of $6.6 million once we've reflected in amortization, in particular, and EBITDA of minus $2 million. And you can sort of see the mix there, our sales and marketing group is very efficient in terms of a spend to revenue and particularly spend to revenue growth and momentum and high investment into research and engineering. Although there was 1 one-off noncash item of $3 million for an impairment assessment that sits in that research and engineering line, which distorts at a fraction. Our balance sheet is strong and is expected to stay strong as we keep growing. So we're in a healthy position from a balance sheet perspective. And this is the liability and equity side of the balance sheet. There's -- I don't think there's anything too notable there in terms of working capital management, et cetera. We have no debt. So just changing gears. We're fortunate to be really in the right place at the right time in terms of market tailwinds. And that's a huge factor in any kind of growth organization. We're helping communications companies deploy their fiber networks much faster. The photograph in the back here, you can see a power pole with 5G antennas attached to it. So 5G networks are very dense in terms of those antennas and they're all connected up with fiber. And we support the engineering practice to assess a pole and also to do the design and engineering work to install the network. It's a big market. There's still probably 5 to 7 years of this macro tailwind to follow with about 200 communications companies just in a race to get their fiber built as fast as they can, and we speed that up. And just some -- an indication here of where North America is at in fiber and 5G, the investment super cycle, but it's just growing and growing, and we're really seeing that in terms of demand from customers. You can kind of see the level of CapEx spend that is being pushed into building these networks. The second market we serve are the electric utilities themselves, the people that own the assets. There's about 3,000 electric utilities. They're dealing with the same challenges across the whole country, which is aging infrastructure and aging workforce that has got a huge amount of work to do, significant liability risks for network failures and these folks really care about keeping the power on and not hurting anybody with their networks. And we help with the quality of -- and scalability of engineering design and also the maintenance of these poles that power put in the back has failed, but you can get a sense of just how much infrastructure is attached to every power pole in terms of fiber and cable TV and all the power assets themselves. What's really interesting about the North American market, and this has come -- this market trend has come faster than was anticipated as a realization that the electrical grid needs to be able to run about 50% of the energy in the U.S. And at the moment, only about 20% of energy currently sits in the electrical grid. So what that means is a requirement to build a lot more capacity, a lot more rigorous engineering and much higher stakes if the power network goes down for any reason. And with global warming and more storms, the electric vehicle market, these businesses now need to power a whole new asset class. It's not just homes and businesses, it's now the transportation market. So it's a really big tailwind for us because utilities need faster, better digital ways of doing this work. And just a graph here. These are billions of dollars being spent on distribution networks across the United States across those 3,000 utilities. As most of you know, we do target these really large Tier 1 infrastructure groups, and we're winning quite a number of them. This list here covers the communications segment. So AT&T, Bell, Crown Castle is the biggest shared services network in the United States. We've all standardized on IKE. And we've got 5 of the 10 -- actually 6 of the 10 largest investor-owned utilities in North America now. We just won another one recently. And then the third segment are the engineering companies that do work on behalf of these infrastructure owners. And we -- they're an important cog in the chain. And so again, we target the very biggest and have a number of them. We sell directly, and we're building the IKE brand directly through a customer experience initiative, and we deliver and grow accounts with a direct team. So just a snapshot here of some of the really brilliant emerging people that we've got in the IKE business today. We've got a team of around 80 in Colorado. And we've got a team of about 25 in Wellington, New Zealand, mostly focused on software engineering. But we hire very specific people with specific skill sets to understand how to build and engineer these networks. And we've been very fortunate in terms of retention and the ability to attract talent through the past 24 to 36 months, virtually no attrition or not attrition that we want to have. And we've been able to hire about 40 new roles over the last 12 to 18 months. Multiple ways that we see the potential to grow. Looking ahead -- we continue to build out our sales and account management team to win new customers and new logos. We've got a long way to run to penetrate the market. Most of our growth -- look at #2, most of our growth from last year came from upselling into existing. Our existing customer footprint, just growing with these businesses as we're more successful with them. They tend to buy small to start, and then we build revenue over time by going across a wider part of the organization. Three, M&A, we've done 2 small technology M&A deals, both have been, I think, quite successful. We should see IKE structural products, which we acquired back in 2019. I think this year, there's an opportunity to have multiplied its revenue 5 or 10x from when we acquired it. And we continue to look at other M&A opportunities and potentially, I think, some well-priced deals that will come through or deal opportunities over the next 12 to 24 months just because of what's happening with the tightening of the private capital markets. And then lastly, international market expansion. We're 100% focused on North America today, but we have opportunities in -- potentially in other international markets over time. I'll go fast through this. Our business -- well, we've got 3 software products, and they all drive productivity for either assessing, designing or engineering -- distribution of power poles. And our business model is to -- every customer pays us a subscription to access any solution. There's a usage multiplier. We're either selling more subscription seats or we're charging our customers a transaction fee. So the more assets they put through the software, we charge them and different parts of the market operate on those 2 different business models. I mentioned we've invested substantially into product and technology development. We're really excited about the next-generation performance product or IKE structural product that's coming to market this year. We've built it with an amazing customer council. These are the standards group leaders within those businesses down there. Some of the names might not mean a lot, but these are the biggest -- some of the biggest utilities and communications groups in North America. And so we've got a real vested interest in terms of this next-generation product and the early signs are really promising in terms of how the market has reviewed what we've built. So hopefully more on that to come in the second half of the year in terms of customer logos to update you on. Similarly, in terms of our automation product called IKE Insight, this is using AI to process power pole information at real scale. We've just announced a partnership with -- that's the biggest data collection company in the world in terms of folks that are out either driving or flying more than 90 countries to fill their -- like mapping software and things. So we can't name them. But think of groups like Microsoft, Google and Apple that are out collecting this data all the time. We've partnered up as they're pole-specific analysis partner, which we're excited about. And lastly, sort of somewhat more boring perhaps, but a big focus for us through this last year in terms of investment has been into systems efficiency so that we can scale and drive revenue per employee outcomes. As we continue to grow revenue, we obviously don't want to be having linear growth in terms of headcount costs, et cetera. So we're focused very hard on systems that can support scale and growth. And there are some examples there of the different programs that we've implemented over the last 12 to 18 months. And similarly, with brand and customer experience, which translates to pricing power, again, we worked really hard on the IKE brand. And -- on the back end of that, we worked very hard on pricing and making sure we price maximize. So a range of initiatives there would support those objectives. Thanks. So Simon, I'd be happy to take questions.

Thanks, Glenn. First question, you described how constraints of 2 customers will impact Q1 transaction revenue. How concentrated is IKE's overall revenue, for example, what percentage of total revenue derived from the top 5 customers.

Yes, it's a good question. We have some concentration risk. I think our top 10 customers represent around 45% of our revenue. And the opportunity for us is just to build more larger customers, which we've had quite a lot of success doing over the last 12 to 18 months.

Noting that $3 million exceptional research and engineering expense in the second half, can you provide further detail on what caused this and what level of R&D expenditure you're planning for FY '24?

So FY '24, we're almost normalizing on the absolute cost that we had over this past year. So we don't see that increasing too materially. The impairment cost that's in there, which is a non-cash item just related to [ and ] every audit, you're required to assess the carrying value of assets sitting on your balance sheet and that requires a 5-year cash flow forecast, and it's heavily impacted by things like discount rates and terminal values that you apply. So we took a conservative view and it resulted in a noncash impairment.

Great. Thanks, Glenn. You're having good success in getting some new large enterprise customers. Can you talk to us about your sales staff numbers more generally about how you think customers are perceiving the company or brand in the market?

Well, some of the things that we're achieving now, we've got stronger and stronger brand recognition. We're -- we just don't deal with the same kind of objections in a sales process that we did perhaps 3 years ago, which often was -- these companies wanting to understand what size you are -- size your balance sheet, et cetera. We don't have any of that anymore because we've got -- some of the biggest infrastructure groups that they are and their reference customers in this market will talk. So that's really helped. And we've continued to grow the sales organization. We've got -- we've got 3 sales teams that run their own playbook. One focus is on electric utilities only, and we start with the very biggest in the country, and we're working our way down that list in terms of addressing that market. We've got a communication sales practice focused on those 200 communication groups. And then we've got an engineering team that focuses on the engineering companies. We're selling them the same products, but with -- it's nuanced messaging. The engineering companies focus on profitability and margin growth by using technology. The utilities are focused on safety, reliability and quality of data, which we provide, and then the communications group are just looking for speed. So it's a different message, but same products.

Just touching again on the R&D expense. Can you provide further details as to why it was included as an R&D expense line versus below the line?