ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good afternoon, and welcome to ikeGPS' FY '24 first half results webinar. Today, on the line, we have MD, Glenn Mellins; and CFO, Brian Musfeldt. [Operator Instructions] Glenn, over to you.

Thanks, Max, and thanks, everyone, for taking the time to join. What I'd like to do today is obviously run through our financial results. But given we had a performance update 3 or 4 weeks ago. I want to be respectful of time. So we'll focus on the results themselves and also some Q3 updates in terms of items that have occurred in Q3 through to the current time. And then there's some other material, which I think most people on the call are familiar with, which I won't go through. So moving to the result itself. So as signaled in the performance update, the first half of the year was a mix for us. Our subscription revenue base and customer acquisition grew strongly and ahead of plan. We had, for the first time, we had a slowdown in terms of transaction revenue and we'll talk about to the detail of the transaction business on the subsequent slides. The result was for this first half period a net loss of $6.9 million, and that's against a prior calendar period of $1 million profit and this change is due to 2 major things. So gross margin was $2 million below the prior calendar period based on the transaction slowdown in the short term. And then about a $4 million movement in terms of foreign exchange gains and also asset fair value movements in the prior calendar period. Balance sheet is still robust, and we'll talk a bit more about how we're managing to EBITDA breakeven through the coming periods. We talked to this in terms of revenue by segment. And you see really solid growth in terms of the subscription side of the business. We expect to see the subscription revenue base grow very considerably over the next 12 to 18 months with the new IKE PoleForeman product release. We expect just the existing customer footprint to add $6 million to $7 million per annum to the subscription footprint. But you see the transaction drop off relative to the same period in 2023. The long-term trend has still been strong in terms of transactions, but we've seen some big communications companies slow down temporarily. They're not lost. In fact, we expect sort of a multiyear situation with them to evolve moving forward. And some detail here on the subscription revenue base. So you kind of see the way that, that is growing quite strongly with new customer wins and also with expansion across the existing customer footprint. The table here in terms of the key metrics across the business. So this is what we always report every quarter at an underlying again here around the total number of customers. We've added 40 new logos and customers year-to-date and currently sitting at just over 400 enterprise customers in North America. So just change gears before opening it up to questions in terms of the Q3 updates. So through October and November, probably 3 highlights just to talk to here today. The first and most impactful item is that the next-generation IKE PoleForeman product has now been released for general market availability. This matters a lot. We've designed this product with a customer council that includes the group's -- the logos you can see below on the lower part of the slide, but these are the biggest electric utilities and some of the biggest communication companies in North America. We expect all of these companies to flip over into the next-generation product. We've built it with them and for them. And it's going to be meaningful in terms of like long-term recurring revenue. So yes, just from the existing footprint, we think we'll grow that subscription base by $6 million to $7 million per annum from some of these key groups. And we truly feel we've built a product here that the industry needs and that's quite differentiated from our 2 other competitors that offer similar products into the U.S. market. The second item is that we have implemented and now fully executed a cost-down program. So the implications of this are around a $4 million OpEx saving annually. Regrettably, this has included releasing some team members from most of them in the U.S. and back office or service positions. We're continuing to build out our Mexico City office, which, in some cases, we'll be replacing some of these roles, but at sort of dramatically lower cost. But this helps us to accelerate our program to EBITDA breakeven and cash breakeven per the plan. And thirdly, just really delighted to have bought Roz Buick on to our Board this quarter. Roz has a pretty amazing career originally. She's a New Zealander, but has been in the U.S. for many, many decades leading software businesses across Trimble and more recently, Oracle in terms of their infrastructure, construction, and utility practice. So I'm just delighted to have Roz joined us in terms of pure experience and scaling software. Software businesses focused on the enterprise space, it construction engineering or the utility sector. And I'll pause there. We've got quite a number of slides that follow here around what IKE does and the market opportunity that we're addressing. We're very fortunate to be, I think, in the right place at the right time in terms of North America. It's just a vast, vast market seeking productivity solutions. And I guess 3 software products that we think an important space across the North American landscape. So I won't go through those slides again. We did that in the most recent performance update. So I'll pause there and open things, Max, to questions.

[Operator Instructions] We've got 1 question here. Will, I'll just unmute you and allow you to talk. Go ahead, Will.

Yes. Just for the presentation. I was just wondering if you could run us through the composition of the 24% increase in subscription revenue between kind of increased penetration in existing customers, new customers, and then price as well?

Yes, sure. A lot of our growth is coming from our existing customer footprint, and I think we're excited by that. We think in terms of the 410 enterprise customers were across, we're about 20% penetrated in terms of the opportunity. These are really large utility customers or communications groups. So a lot of that growth has come through just adding users and adding footprint, particularly around the IKE Office Pro solution. Interestingly, we announced about 8 weeks ago, a new major subscription customer in California. It's a communications group engineering, about [ 1 million ] assets. And that's a new logo, which will represent probably $1.5 million of subscription revenue over the coming 12 to 18 months. So there's been some important new logo wins, but a lot of the growth is coming from the existing footprint, and we do expect -- we expect that kind of pattern to continue, particularly with next generation performing being released to market. That's just an upsell opportunity to our existing customer base. which is clearly preferable to chatting new logos.

Yes. Awesome. And could you maybe talk through the strategy once you've kind of won a logo, what does that strategy looks like in terms of converting, I guess, higher penetration? .

Yes. I mean we've got a sales playbook. We've got specific account directors that are winning business for us in the first instance, and then we've got a team of account managers who are the folks that grow us inside of existing customers. So it's the classic bow tie sales process for a SaaS company, especially when you're selling to electric utilities, you've got everything up to winning the customer and deploying. And then you've got an entirely different sales strategy, which is around growing our business and making them as successful as possible with our products. So we have a lot of experts in-house, we call them solution engineers, but they are folks that just know how to build networks and they get in and help our customers be successful using our software, which is where the account development occurs.

Yes, perfect. And then last one for me. Maybe if you can just touch on the transition to the next-generation PoleForeman and then kind of how quickly you'd expect that transition from customers to occur?

Yes. Look, we're -- as I said, we've built the product with a customer council that includes 5 of the 10 largest utilities in the country. And to begin with, we're converting those groups across to the new product and the new business model. And it's a really material change for us in terms of revenue per annum. Some of these very large utilities moving from $30,000 or $50,000 per annum to $0.25 million or $0.5 million per annum under the new product terms and conditions. And we expect all of them to come over more or less. So it will take a little bit of time. We will end of life, the legacy product at the end of calendar 2024. So there's some time for focus to come over, but we're going to -- there's so much benefit out of the new product set. We think customers will come over reasonably quickly.

James, do you want to go ahead on line?

Yes. Just got 2 questions with regard to the Google relationship. First of all, just when do you think it will generate revenues hike? What does that look like? And then could the relationship with Google take you into other markets? Yes, obviously, combine that 99% of your revenues are U.S. based at the moment.

Yes. So we're in proof-of-concept programs at the moment with customers. And that sets us up for going to market with Google in calendar 2024. And I think, obviously, whether I've got a global footprint, our real focus is on the problems in the North American electric utility market. So the that's where we'll be focusing with them.

Next question, can you clarify the time loans towards EBITDA breakeven?

SP-3 Yes. So I think our current plans would say that we believe that 2025 as a fiscal year will be a breakeven year. that will be pushed by the strength of the addition of the IKE performing product coming in online during that year as the customers adopt. So we expect it to be we will be officially probably breakeven in the back half and the whole year should be pretty close to breakeven neutral.

Thanks, Brian. How are you building awareness inside accounts? And should we be seeing stronger growth inside accounts?

Yes, that's the key thing. We focus really hard on growing accounts, and it does take time. We've got a lot of good case studies now of customers that have started small and have grown to be quite significant. Crown Castle is a good example. We started regionally with Crown Castle, we managed to get in front of the corporate team, and they've now rolled us out across the entire Crown Castle network. They're the biggest shared infrastructure group in the country have a overhold office dedicated to IKE coordination in terms of their business. So yes, we work really hard at account development. And like most of our growth is coming from account maturity and account growth. So you can never be too good at it, but we focus pretty hard.

Next question. How should we be thinking around the timing of transaction volumes and the type of projects that are likely to lead?

Yes. Honestly, we've sort of had a perfect storm in the last 2 quarters with several high-value customers from -- if you're looking at prior calendar period, that for unrelated reasons just slowed down their engineering for different reasons. And these customers aren't lost. I mean we have close relationships with each of them, and they are all communicating sort of a multiyear commitment to IKE and also to their network development programs. So we do expect all of them to come back. It's hard to know exactly how fast and when. But we're pretty optimistic in terms of the ultimate sort of stickiness for us or the platform.

Next question. You did an acquisition which offers AI functionality not long ago. Have you sent tailwind from AI? Or is this insignificant in the context of our business?

That's a really good question. AI became it became a really almost a duty word. There was so much hype and over price and delivery from AI generally, especially in the infrastructure center. I think what you're seeing with generative AI and some of the effectiveness of things like ChatGPT, it's completely unrelated to what we do. But it's provided real credibility that the stuff can work, and it can deliver lots and lots of value. If you look at what Microsoft is doing with copilot and sort of similar examples. I think it's giving a lot of credibility to AI. And that does have some kind of flow on for us as we're positioning automation for lots of this work that engineers are doing. So we're really optimistic about the potential for our icon site capability we've built it, it works that can save infrastructure companies a lot of time and a lot of money. So we're working pretty hard to commercialize the insight capability at the moment. And part of that is our work with Google processing all of their street view data.

How our transaction revenue is tracking this quarter?

The quarter-to-date they've remained relatively subdued if you're looking at prior calendar period. But the indications are quite strong, both in terms of the existing customer footprint plus some sales pipeline opportunities that are quite significant.

Thanks Glenn. That concludes the Q&A section. I'll just give it back to you for some closing remarks.

Great. Thanks, Max. Thanks again, everyone, for taking the time. I know it's been 2 conference calls in short succession, but I appreciate everyone joining. And obviously, we're, both Brian and myself, are accessible at any time. So please either e-mail or will give us a call if there's follow-on questions.

That concludes this webinar.