ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good afternoon, and welcome to ikeGPS's First Quarter Results Webinar. From the company today, I'm joined by CEO Glenn Milnes and CFO Brian Musfeldt. [Operator Instructions] I'll now pass it to Glenn to start the presentation.

Thanks, Max. Thanks, everyone, for taking the time to join for the Q1 update. What I'd like to do today is just try to pulse through some slides first and foremost, get through those within 12 to 15 minutes and then leave time open for Q&A. So please take note of this important notice. I know there's some folks that aren't familiar with IKE. In terms of our FY '23 performance, we grew last year to about $31 million of revenue with 93% growth, continuing to build the business, addressing the electric utility and communications market in the United States. We've got around 380 enterprise customers today. From a Q1 perspective on -- this is looking at PCP in terms of the chart on the left. We were slightly down on Q1 of FY '23, which was a well-signaled change in terms of transaction revenue. So this is volume from some important customers. And we'll talk a bit more about the revenue mix and the components of the forecast as we look forward. Our subscription revenue has continued to grow through the last few PCP periods. So we had about 36% growth in terms of underlying subscription revenue. So keep in mind, our business model is that every customer subscribes to the IKE platform, and then we have multipliers around per seat or transaction revenue. And we'll talk a bit more about the next-generation PoleForeman product that's being released into the market in FY '24, which we think will have potentially a very positive impact on this underlying subscription revenue component. Our transaction revenue on a PCP basis is down, but that's trending positively. The reason it's down in Q1 is because of some leading customers that are working with utilities that have some old-style practices in terms of how they consume fiber attachment information. We've actually worked through this with the underlying customers, and our indications from our long-term customer base, that give us a fairly accurate and robust guidance around volumes and revenue, is that things will pick up very strongly through the latter half of Q2 and through the rest of the year and beyond. We always release this chart in terms of the key metrics in the business. I think there's probably 2 notable items. The first is around the gross margin profile for transactions. We do have some fixed costs that sit behind the transaction product item. And because volume dipped off this quarter, our gross margin percent has fallen off accordingly. We do expect that to come back strongly through the balance of FY '24. And you can see growth in terms of number of enterprise customers. Our products tend to be very sticky. We have very little churn in terms of customers and customers grow over time. So we've continued to add about 1 customer a week in terms of our sales footprint and the subscription revenue piece of the business has grown consistently strongly over the last few years. I'll pulse through these slides quite quickly. I know many of you know our business well, but some others do not. But from a market perspective, we're likely to be in the right place at the right time. We're addressing 2 specific segments in North America -- we're headquartered in North America in Colorado. The first is supporting companies that are deploying [Technical Difficulty]

Can you hear me, Brian? It looks like we just had -- Glenn drop off.

Yes. I can still hear you, but I think we've lost Glenn and the presentation.

Apologies. I think we'll just give Glenn a second to hopefully rejoin, then we can commence the presentation.

Yes, I just spoke to Glenn, he'll join back in here in a minute.

Hi, Brian, I'm actually just checking if I'm back. Let me share my screen. I just lost connectivity. Ironic, given we're talking about fiber networks, and deploying them better and at speed. I'm not quite sure where I fell off, but talking about our market, it's just very significant what's happened with fiber. It's probably running as a tailwind for us until 2028. We help networks get deployed faster. We've got many of the largest fiber businesses using IKE. Hoping that we will arrange more of them over this next 12- to 24-month period. Some more data there, and just in terms of where we are in terms of the investment supercycle into fiber and broadband and 5G deployment in North America. Now the second market we support is the electric utility industry. There's 3,200 electric utilities in the U.S. and there's about 110 investor-owned utilities. They are the largest groups, but there's a really big long tail in terms of the utility market. Approximately 2,000 engineering companies that support those electric utilities to keep their networks hardened and resilient and building capacity for the electrification of virtually everything over the next 20 to 30 years if you think of the electric vehicle market and the carbon zero targets and what that's doing to grid capacity. And again, we help the design process and the maintenance process of distribution assets for electric utilities. So we're lucky to be in the right place at the right time. Just these big market tailwinds make a lot or contribute a lot to the success of growth companies and technology companies being in the right market at the right time in terms of growth. So we're privileged to be supporting these important infrastructure companies. Again, some more data on just the level of spend into distribution networks where we play. We've got -- today, we've got around 395 enterprise customers across North America. It has taken some time and a bit of a sense of humor to win these really big infrastructure companies. But we target across the communications side, some examples of logos that may or may not mean much, but AT&T is the biggest communications company in the world. Crown Castle is the biggest fiber deployment company in North America. And we've got -- now we've got 6 of the 10 largest electric utilities in the United States using our platform. So it takes time. But if you serve these customers well, we have very much a land-and-expand sales model, and we're seeing that play out. A lot of our growth is coming from existing logo growth over time. And we've only got 6% of the market at the moment in terms of logos, so just a lot of room to continue to expand. So given the connectivity outage, I'll go really fast here. We sell, we brand and we deliver directly to customers. Our headquarters is in North America, 80 of our 105 people are based here in North America. We've got some really brilliant people that are expert in deploying networks, and our products deployed there will reflect that approach. So we have 3 software products that are connected. One is around the design, the digital design of power infrastructure, the next is around the collection and assessment of power infrastructure, and the third is around how we -- at real scale, like whole of network scale -- use technology to be able to assess distribution assets; that product's called IKE Insight. And we provide technology-enabled services through IKE Analyze, and our goal there is to automate as much as of that process with technology as possible. So just a reminder, if you just look at the circle on the left-hand side, not all the words, every customer subscribes to our platform and then we have a multiplier, often that's transaction revenue. That just means it's how a lot of the industry operates. Every time they put an asset through our system for design or assessment, we charge a fee and clip the ticket on that process. There were 2 slides, before we go into Q&A, that I did want to focus on a little bit, because over the past 2 years IKE invested significantly into engineering and product development. But the exciting thing is a number of products and capabilities that are coming to market right now. So through FY '24, we are launching the next generation of our PoleForeman product. It's already used by 6 of the 10 largest utilities in the states and many others. It's been designed with the product council to meet the standards of the industry or the needs of the industry. But the interesting thing, I think, from an investor perspective is the ability here to -- from a -- it's not a forecast, from a range perspective, we could 5x the current annual subscription revenue from this product just from our existing customer footprint. And that will be very material over the next 12 months, I think, in terms of our revenue mix and just the predictability of very high-quality subscription revenue. So we're excited about that. We've also worked very hard around automation capability specific to power pole infrastructure. We've partnered with one of the biggest data collection businesses in the world. But in essence, we've got a capability now to be able to process data that's coming from Google Street View, Apple Street View or Microsoft Bing Streetside data and apply it to power pole infrastructure and fit into the workflows of utilities. And every utility in the United States needs to perform joint use audits and joint use activities. And this is an activity that happens every year in perpetuity. So we're excited at the point we're getting to now, going to market with a very big data collection business and the ability to do these joint use audits at whole of network scale. And I think for shareholders and investors, this is important because, again, we've invested in product development over these last 2 years or so, and we think these will pay back fast if we execute well from here. So with that, I will pause. And Max, pleased to take any questions.

Thanks, Glenn. [Operator Instructions] First up, can you shed some light on what contributed to the decrease in margin on transaction revenue? Is this cost or price pressure? Or is there a fixed component? How do you see this tracking into the future?

It's a good question. There's a fixed component. We're building our transaction capability to continue to scale as fast as it has been. And so when we have a down quarter of volume like we just did, you see that margin compression. We do think it will bounce back strongly through FY '24. I mean the second part, Max, is we're also building automation capability. So we take people out of the process. So again, that should drive margin growth.

Transaction revenue appears to have fallen over 3 quarters since the high point in Q2 FY '23. Apart from the 2 large customers' impact in this quarter, are your other customers increasing their use of the platform?

Yes, we've had no churn in terms of -- so all of these customers subscribe to our platform as well. And we ride the volumes that they deliver. So with -- there's some seasonality through winter, but it's not overly material. And all of our indications -- we're lucky to have long-term relationships with many of these groups, and the indications are that volumes -- again, this isn't a forecast, but the indications are that volumes are going to grow substantially over the next 12 to 24 months just based on their commitments to programs.