ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good morning, and welcome to ikeGPS' first half of financial year 2024 update released on the ASX and NZX this morning. From the company, so we have the CEO, Glenn Milnes, who'll run through the presentation up on the screen before we get to Q&A post the conclusion of the presentation. [Operator Instructions] Glenn, I'll hand it over to you to go through the presentation. Thanks so much.

Great. Thanks, Simon. Thanks, everyone, for taking the time to catch up and meet this morning. So further to our update that was released to the market, I just wanted to go through -- we've got quite a number of slides, but obviously, we want to focus on some performance outcome items and then open things up for Q&A. So please take note of that important notice. Yes, I want to chat through the first half performance numbers and then talk, as we did through the Annual General Meeting, talk about the addressable market and IKE's value proposition. I think most of you on the call know the background for IKE. We've grown and grown through the last couple of years. Over through FY '23, we grew 90% to $31 million of revenue. We've got about 400-plus customers in the North American landscape driving productivity outcomes for electric utilities and also for communication companies that are deploying fiber networks. So in terms of the first half of the year, we've had a mixed period. This is really well signaled, I think, to customers and to investors. We've continued to grow our subscription revenue base pretty strongly. We've had a temporary slowdown in terms of transaction revenue from some core customers. This transaction revenue is coming back, we expect pretty strongly through the second half of the year and also through taking a medium-term and long-term view in terms of IKE. And just as a recap, we generate revenue from subscription revenue customers. And then on top of that, some of our customers pay us transaction revenue as they do more engineering with our software over time. So we had a slowdown through the first half of this year. If you look at the way that our revenue mix builds, the subscription piece of what we're doing has grown strongly. We keep adding customers. They're pretty sticky. And we've got a next-generation PoleForeman product that's adding to this over time. So this will continue to build, we think, in a really positive way over the coming second half of the year and to next year. The transaction piece has been influenced by some really large national U.S. communications companies. Again, these long-term customers of ours are indicating that they will continue to grow pretty strongly over the next half of the year and the rest of the year. So while we've had like a dip down in terms of transaction revenue, we expect that to come back quite significantly over the second half of the year and definitely into next year. We've got very close relationships with some of these big national communications groups. And we feel really confident about where they're at and how they're using IKE software going forward. And we always publish the same table in terms of kind of the key metrics across the business. So taking a medium-term or long-term view, again, we think we're in a really healthy position across the broader business. So some of these slides for some of you is repetition, but for others, it might be new. But we have these slides to represent what IKE does from a software standpoint and the value we bring to the market in North America. So I'm just going to post through this really quickly, but more than 3,000 electric utilities in the North American landscape, more than 200 million distribution assets. So IKE's value proposition is to digitally improve the way that engineering companies and electric utilities design and maintain their assets. We think this is a 20- to probably 30-year market tailwind. And again, just to provide something of a visual view of just how big this market landscape is, we serve all 50 states across the United States. We're based here in Colorado in the U.S. This is the footprint of investor-owned utilities across the North American market. And today, we're in 7 of the 10 largest investor-owned utilities. But it's simply an enormous market opportunity in terms of what we do for the electric utility landscape, and we're expanding our footprint fast. And then if you look down below that investor-owned utility landscape, again, there's more than 2,500 municipalities and cooperatives that again run the electrical grid across the United States. And they all represent really large annual software opportunities for the IKE footprint in terms of designing the network, running the network and maintaining the network over time. And again, another chart just showing the sheer scale of what's being invested in terms of building distribution capacity and resiliency across the U.S. So these numbers are in hundreds of billions of dollars in terms of distribution network spend. So yes, we really feel we're in the right place at the right time. We have a suite of 3 software products. One is around understanding how to design your network, so doing pole loading analysis for every pole. That product is called IKE PoleForeman. We've got a system around assessing and designing your network, which is called IKE Office Pro. And then we've got like a bulk data processing product called IKE Insight, which allows these electric utilities to like see their network at a whole of scale. That's called IKE Insight. So IKE is around building out a whole suite of capability for productivity and efficiency around the electric utility grid. So again, we mentioned we're in -- today, we're in 7 of the 10 largest investor-owned utilities. We're in hundreds of utilities overall and a bunch of the communications companies that are designing these networks, most of which is going over here in the United States. We go to market directly. We're building out a team of experts who really understand how to assess, design and build and engineer an electric utility grid. As I mentioned, we're based here in Colorado in the United States. And we've got a sales motion that supports that. So we do work with partners, but we have a direct go-to-market strategy. We have a direct go-to-market sales playbook that lets us address and deliver these really, really large, but important customers in the electric utility market. So posting pretty fast here through what we do, but there are some visuals on kind of how our software actually gets used in practice. And I know with an Australian or New Zealand lens, sometimes it's difficult to understand the size and scale of the U.S. market. This is like looking at the very bottom end of Florida in the United States. But here's a lens of how our customers are using IKE software. So this is both Crown Castle. Crown Castle is the biggest shared fiber communications network in the United States. They use IKE everywhere they go in the United States. Just a view on how they use IKE software to think about designing their network. And then zoom out, looking at AT&T, it's the biggest communications company in the world, how they think about using IKE for all of their markets across the United States as they roll out fiber. So just a visual representation of the use of IKE software. And the reason they use IKE is because we just help them deploy their networks faster and -- faster and better in terms of the whole deployment process. So again, just an enormous market opportunity. Again, we talked to this in the Annual General Meeting a few weeks back. But we're just at the very start in terms of how electric utilities and communications companies are deploying capital and deploying their network dollars, which is how we play. So some examples here of some logos that are relying on IKE every day at the moment. At the top, we've got the communications companies; some of the biggest groups in North America on the electric utility side in the middle. Again, we're just getting started in terms of our footprint, but we do have some of the very largest electric utilities in North America. And then down the bottom, the very important engineering partners that we work with that do a lot of this work for us. Some more market data for this group to look at. But the spend is extremely high. It's growing and growing and growing. It's not going to stop for the next 10 to 20 to 30 years based on requirements in terms of the grid itself. So we're lucky to be in the right place at the right time. And some more detail here on just the market drivers. Again, IKE helps this process happen faster, better, cheaper in a digitized standard. But again, some really significant market tailwinds in terms of driving our business. Some more detail there on the customer footprint. We added 1 of the 10 largest investor-owned utilities through this last quarter, which we're very excited about in terms of being able to expand footprint. I'll just go quickly through the first half period. There were a number of significant items. Although from a total revenue standpoint, we step backwards. We brought on some of these big customer footprint items, and I think that really supports our view on the broader revenue growth item through the second half of the year. And especially as we look at FY '25, brought on some new Tier 1 customers in terms of one of the larger national fiber businesses. Operating initially, we've closed a $1.5 million subscription contract in California with a big communications company. We converted 1 of the 10 largest investor-owned utilities on the East Coast of the U.S. in terms of our next-generation IKE Foreman products. And we also actually brought on one of the largest national engineering companies that serves the electric utility market. So we've continued our run rate of new customer wins. I think from a -- with an investor lens, we've invested a lot as a business into new products and new product capability. We've launched this quarter the next-generation IKE PoleForeman product with a pretty amazing customer council in terms of the support of a standards group and customer council that includes these logos below, which might not necessarily mean a lot, but it's expected to increase our recurring subscription revenue just very substantially with our existing customer footprint for IKE PoleForeman. So that has occurred, and we're already converting customers into this new business model through the second half of this year. And then finally, from a product innovation perspective, we have partnered with Google to bring our capability to market around doing things like network viability for telecommunications companies. So I won't labor too long on the technical capability here, but we're giving our customers the ability, like a whole-of-network scale to understand how they can deploy a fiber network as fast and as efficiently as possible. And there's some imagery here around how between IKE and Google data, we can start to show a network company around where that should go and how that should go in terms of overhead network deployment. So some imagery here around how easy it's going to be and how fast and how cheap it's going to be to get a network deployed at scale, so with some graphics around understanding how these networks get deployed over time. We've added some great talent in terms of the team. So really pleased to introduce Brian, who's here on the call. He's our CFO. Brian has got a huge amount of experience in the public markets and private markets on the communications and network side of things here in North America. Also with Brett Willitt joining us from Bentley and SPIDA Software. They're a key competitor on the structural analysis side. So Brett has joined us as our SVP of Product amongst some other people. We acquired the assets of Marne & Associates. So that gives us more capability in terms of training and education, so just touching and being much closer to our customers and the ability to talk about some of the problems that our customers face, but also talk about some of the technology that we have that helps our customers to do things better, faster, cheaper over time. So that's a -- it's a key part of our go-to-market and sales and marketing strategy. I think as you -- most folks on the call know, we expect to just continue to grow and grow. There's a number of avenues to do that through winning new customers. We've only scratched the surface in terms of winning logos. There's a very significant cross-sell and upsell item in terms of how we -- when a customer grow over time, we are still looking at more M&A, which has been a successful route for us as well. And eventually, we're looking outside of North America in terms of market landscape. So we feel really optimistic about the ultimate avenues for growth. So Simon, I'll pause there. Thank you. I know I went through a bunch of slides quickly, but keen to take questions.

Right. Thanks, Glenn. [Operator Instructions]

But first question, Glenn, enterprise customer numbers appear to have fallen in the period contrary to the commentary. Please explain what's going on here and why so it was removed from the operational data table.

Yes, I can take that one. I'll take that one. Yes. So sorry, guys, I -- we removed that -- I removed that line from the subscription. We had that enterprise customer line buried in the subscription revenue line on that table. I didn't think that was appropriate. That really represented all the enterprise customers of the company. So some of those customers would probably be better reflected in the transactions or the other categories. So I removed that. We will bring that back in the right categories next time, but I see the follow-on question here. So just to give you the numbers again, we added 31 customers this quarter -- or first half, excuse me, and that brings our total customer count up to around 408 right now. So I just want to make sure everything is clear. When we said enterprise customers, that's all customers across all 3 of those segments, and we'll get that broken out better in the next disclosure.

Perfect. Thanks, Brian, well explained. Have transactions returned to prior levels yet? The commentary makes me think the recovery may be more of a slow build back rather than a step change.

I think the -- I mean we've always explained to shareholders in the market that we've got some customer concentration risk. And we've almost had a perfect storm actually through the second quarter of the year. These customers are long-term customers. They are all communicating that they expect items to come back at real pace, I think, through the second half of the year and into the next financial year. So none of them are going anywhere. We've just run into some regulatory hurdles indirectly through them through this period. So we actually couldn't be more optimistic in terms of how the whole prospective period is appearing.

Right. Thanks, Glenn. You probably just sort of answered this question just with your answers then. But how often can we expect slowdowns similar to this to reoccur?

Look, I think the market tailwinds are so strong behind what we support. So I take a big-picture lens, I think things are really robust. So we're talking about national communications companies deploying networks, and they've got 3-, 4-, 5-, 6- or 7-year CapEx programs committed to their network builds. So yes, I think overall, we're in a really good spot. We've run into some regulatory challenges not related to us and not actually not related to our customers, where these groups have slowed down, but we're expecting to speed right back up.

Thanks, Glenn. Just last question, what's the rollout timetable for PoleForeman? How many of your enterprise customers would you hope to have upgraded its PoleForeman by the end of this financial year or next financial year?

Yes, it's a good question, and it's really meaningful for our revenue profile. So next-generation PoleForeman is rolling out right now. So it's with lead customers, and then the hard launch has occurred. And we expect a lot of our major customers to convert through the second half of the year. And that's really -- it is really meaningful for our revenue profile. So that's driving recurring revenue of $5 million to $6 million to $7 million of annual revenue from some of these big investor-owned utility customers. And they -- our expectation is they are all converting. And again, we're talking about customers that have hundreds, if not, in some cases, more than 1,000 engineers that use the PoleForeman software every day for design. And all of these customers are on our customer council that help us design the product and release the capability. So it's a really meaningful step in terms of product capability.