ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good evening or good afternoon and welcome to ikeGPS' Third Quarter Financial Year 2024 quarterly update released to the NZX and ASX this morning. From the company today, we have Glenn Milnes, the CEO, who will go through the presentation up on your screen, and we'll conduct a Q&A segment at the end of the presentation. Glenn, I'll now hand it over to you. Thanks very much.

Thanks, Simon, and hi, everyone. I appreciate everyone taking the time to hear our update. It's been a -- despite recognized revenue numbers, it's been a really strong quarter for IKE. And it would be great to spend time just describing why it's been such a positive period for the IKE business. It's been tied to our new IKE PoleForeman product release and sales of that product and also visibility to transaction revenue. So what I'll do is I will skip past this important notice in terms of acceptance, the terms of receiving the presentation. We'll go into the Q3 FY '24 performance, which is the chart you've seen in the update and talk to some context. We'll dive into a little more depth around the IKE PoleForeman product release and a broader sales update related to that product. And then we have some repetition just looking at IKE's addressable market, our value proposition in the North American electric utility and communications market and why we think we're in the right place at the right time. We'll try to leave at least 15 minutes open for Q&A at the end of the session. So I will move pretty fast through these 30 slides or so. But from a revenue perspective, clearly, we are down on where we were this time last year was sort of a super cycle of transaction revenue last year at this time. We still have reoccurring and recurring revenue, making up 85% of our revenue mix year-to-date. And based on everything we can see in terms of our pipeline, we do expect healthy growth in the FY '25 period and beyond, and we can talk to some detail around those items. So in this chart, the blue bar represents SaaS revenue, so pure subscription revenue. Orange is hardware and other revenue, and green for us is platform transaction revenue. And remember, these things layer on top of each other in terms of how our customer buys and acquires our products. So from a subscription revenue, it continues to be strong. We've got a CAGR of over 30% over the last 4 years with 24% ahead of where we were at this time last year. But this is probably the really important chart, I think, from an investor and shareholder perspective because of what we believe we're going to achieve with our next-generation structural analysis product called IKE PoleForeman, we think this is going to materially accelerate over the next 12 months and 24 months. And I'll go into some detail around why we're very confident about this pure ARR line in the business model. But transaction revenue was down versus PCP. So we've signaled this significantly over the last 3 quarters around this slowdown. The good news is we're seeing a couple of these very large Tier 1 communications companies who are deploying fiber that use IKE for their programs are coming back with contracts. So it's not yet flowing through to recognized revenue, but contracts are coming back in a positive way, which gives us confidence in terms of both the existing customer footprint plus some new ones. This is our standard table that we publish every quarter around the metrics that matter most to us from a business growth standpoint. So it's the same story. Number of billable transactions coming through the system, mostly from communications companies dipped through the last 2 quarters. We do expect those to come back. But the number of platform subscriptions has continued to grow just quite consistently. And that will be the number that we expect to materially grow over the next 12 to 24 months based on product development, and hardware and other revenue has been pretty stable in terms of hardware and other revenue being mostly services and training. So just going into the detail of the Q3 update, I think the most important item for our business and for our customers and also, I think, for shareholders has been the release and sell-through of IKE PoleForeman. So just as some background, we acquired the IKE PoleForeman about 4 years ago. At that point, it had about $0.5 million of subscription revenue. We've built the business over the last few years, and we've refactored the product, releasing now with a really enhanced product that we're proud of, thanks to Malcolm Young and the IKE structural team and beginning to close some of these really meaningful customers with long-term contracts. And so we've released the detail of several of these detailing here one of the largest Investor-Owned-Utilities in the U.S., they will translate them from about $50,000 to $60,000 customer per year to $700,000 per year under IKE PoleForeman more than 1,000 licenses going into engineers across this business. So more than a tenfold increase in terms of annual recurring revenue from this customer versus where we were just 1 or 2 years ago. And we're repeating this at the moment in terms of targeting our customer council. So another really strong deal in terms of an electric utility, $0.5 million 3-year subscription commitment to the program, more than 150 engineers in that business that will be locked on PoleForeman. And we do a good job with this product. We'll keep these customers forever. It's very sticky. It's very hard to retrain on this program, which helps with design. And there's some other examples. And as we disclosed in the update today, we do expect other substantial subscription contracts from these very large utility groups. Over the coming months, we believe these are imminent and helps to set us up in terms of really growing out this platform product. We've also continued to selling our IKE Office Pro product, which is the core revenue generator in the business today. And there's some detail of products there. From a transaction revenue perspective, we are down on last year based on sort of that -- sort of hyper growth, I think this time last year, we were 300% or 400% up on the prior year. We are starting to see customers tick back up in terms of velocity and transactions. So we've signed agreements, 1 with a substantial electric utility here in the U.S. that should generate sort of $1 million to $1.5 million of revenue over the next 2 to 3 years. And one of our slowed communications companies has come back with some volumes. So that would generate $0.5 million through the next quarter. And we expect another $0.5 million in the following quarter based on indications. So overall, we've just continued to track quite strongly about 1 new enterprise customer a week, about 40 new enterprise customers in the 9 months to 31st of December. The last comments here were really around our cost-down program that we implemented in Q3 and announced then the benefit of that program, which is taking about $4 million per annum of cost out of the business, impacts from now. So we start to get the benefit of that from a P&L perspective. We also note here our total cash and receivables position. At the end of December, we had $8 million cash and $7.2 million of receivables. At the end of January, we're now in the first week of -- first week of Feb. Our cash has increased to $11 million, receivables have decreased to $3.5 million. So we've still got a healthy balance sheet position. And the last thing, and maybe there'll be a question towards the end of the presentation, but our -- we've acquired a small training and education business in the second half of this year, training our customers on NESC compliance, National Electric Safety Code compliance, how to apply it to their business. For us, it's a way to access customers to education to the new sales strategy. So that business has got off to a really strong start since we've taken it on 90 days or so ago. So we're really pleased in terms of customer uptake and market interest in that product. So from here, I'll accelerate through these slides because there's slides that many of you have probably seen before. But just trying to explain what we do in the market opportunity that we're addressing. Focused 100% here on the North American market landscape. So we've got a suite of distribution products, trying to solve some big problems for distribution networks here in North America, IKE Structural, how you design your network. We're one of the 3 or 4 standards in North America. We've got IKE Office Pro. This is how you digitize your assessment of your distribution network, and we have IKE Insight. So that's an AI platform for processing massive amounts of data like Google Street View data and being able to make network -- distribution network decisions. And then we have IKE Analyze, which is a program that offers technology and automation to accelerate engineering for our customers as well as training and education. That's what we do. The reason that we're focused on this is it's just a huge market. There's 3,000 electric utilities, 200 million distribution assets. They're facing the same challenges around grid resiliency as in don't fail in a storm, don't cause the next fire, grid capacity. So how do you power the electric vehicle market and create more capacity and to the electric utility network and a bunch of other obligations around regulatory, engineering and legal liability risks. And so we try to dramatically improve this engineering, design and maintenance process. It's just a huge market. This is North America and United States of America, just having a look at the investor-owned utilities only and the kind of footprints that they cover as 106 of them and with the standard right now and 7 of the largest 10, but we've got a huge expansion opportunity. This next map again, is the United States of America. These are the municipality and cooperative electric utility companies. So there's more than 3,000 utilities in the United States in total. They all represent an opportunity to sell IKE products and services. They're smaller operators, but they matter. And then just overlay on top of the United States map, more than 2,000 engineering companies that serve the electric utilities. It's just an enormous industry but all with a pretty common problem, and that's what we're trying to standardize to. Again, it's sort of an up and out chart, but this is billions of dollars of CapEx that's being spent by electric utilities on improving the distribution grid. It's a big problem, and it's not stopping. It's going to run for the next 25 years. So we're just fortunate to be in the right place at the right time in terms of the products and services that we offer. And we are winning about 1 customer a week, 7 of the 10 largest utilities are on our platform. And we land and then we expand. We've got products that are complementary but are not tied to each other. So we've got the ability to go into a customer in a small way and then grow over time. And actually, 1 of the deals that we announced this quarter with an electric utility is a great story where 2 years ago, we were selling $20,000 of design software into their business. They moved to IKE Office Pro, it is another $100,000 per annum of subscription revenue, and now they've moved to IKE Analyze and we expect them to be $400,000 or $500,000 a year using sort of a fuller suite of our products. And that's the real opportunity for us is to land and then expand. Seeker market we serve is the communications sector. They're deploying fiber at a really rapid pace. We help them deploy their fiber networks faster just with better tools, digitization and automation. It's more concentrated. There's probably 200 communication companies competing in the North American market, probably 2,000 engineering companies that support them in this work. And the market is still growing. It's a bit counterintuitive, I think, for folks in New Zealand and Australia, but the investment into fiber and into the 5G is continuing to grow. Again, we're getting a footprint into some really important customers. So on this list, some of these names might not mean a lot. From a Southern Hemisphere perspective, Crown Castle is the biggest shared communications business in the world, deploying fiber across North America have standardized on IKE AT&T, biggest communications company in the world, Bell Canada, in particular, is a big customer and other groups like Metronet and Allo, which are like Tier 2 fiber businesses but deploying across the whole country. So again, the opportunity here is to target from top to bottom, biggest to smallest and help them go faster in terms of fiber deployment. So the market just keeps -- we'll just keep growing. It's an enormous total addressable market from a top-down perspective. And again, our goal is to help these customers just be better, be safer and be more efficient. In these tailwinds, we -- based on analyst views, we don't think they're going away anytime soon. So our goal is to execute really well, provide the best customer experience in the whole market, and just continue to grow our footprint. We go to market directly. We have a direct sales engine and direct marketing engine and direct brand engine and it's all around expertise. So we hire people that really understand these network programs and sets of challenges that they face. So again, I'll go even faster from here, but just wanted to again provide a view. If you're a customer of IKE, this is how you're using our software or this is the scale of potentially how you use IKE software. This is Crown Castle just in the state of Florida. Each of these dots represent a network footprint that they've used IKE in terms of deploying fiber and how they've designed and approved their fiber network. This is kind of even a bigger view. This is AT&T. Each stock represents a city where IKE is being used to, again, assess and get approval for fiber deployments going in the case of 7 example states here. And so albeit we had a tough couple of quarters on the transaction revenue side in terms of items dipping down, we actually feel extremely positive about where things sit right now in terms of our business expansion. And it comes from expanding our sales team and partner program. We've got this cross-sell, upsell opportunity, selling in 1 product and then over time, selling in more of our products. We're still really interested in being able to add high-tech software businesses into our platform that we can add brand value and go-to-market value pricing value, et cetera. And then over time, international market expansion outside of North America. So Simon, with that, I'll stop and also just welcoming Brian Musfeldt, our CFO, onto the call for Q&A.

Great. Thanks, Glenn and thanks Brian, who is available for questions as well. Just a first question, Glenn, given how IKE PoleForeman developed as a product or asset, what's your view as to the value over the past 4 years since its acquisition?

Look, we've been lucky with PoleForeman. So we acquired that business. It had about $0.5 million of recurring revenue when we acquired it. We grew it to close to $2 million under the legacy products. And now we've built this next-generation product called IKE PoleForeman. And the really exciting thing is what this can do to ARR and I believe by the end of this year, we should be able to get to $5 million or $6 million of true annual recurring revenue from this product. And we've announced a couple of deals, the biggest of which was a $3.5 million commitment to 1 of the top 10 utilities in the country. So it's exciting. We've got a job to do to convert all of our legacy customers. After we've done that, we've got about 140 legacy customers on PoleForeman. So there's a job to go there. And then afterwards, we focus on churning our competitors and going after -- there's more than 50% of the electric utilities that haven't made a decision on structural engineering software. So it's a really big greenfield opportunity, I think, as well.

All right. Thanks, Glenn. Can you talk to us about the competitive landscape and if there's much in the way of M&A on the horizon or anything that has been merged in the past?

Yes, it got very heated maybe 18 months ago, when M&A across tech generally was quite hot. And we saw a couple of the really big Tier 1 tech companies come in and buy various businesses. So there has been some consolidation. We almost see an opportunity to really go hard at a couple of our competitors that were acquired because they've been hollowed out to some extent, and we see opportunities to take market share, I think.

All right. Thanks, Glenn. There's no other pending questions. I might just hand it back to you for closing remarks.

Thanks again, everyone, for joining. Obviously, Brian and I are available to cover questions after the session. So we'll be happy to connect with anyone at that time.

All right. Thanks, Glenn. Thanks, Brian. And if there's any further questions, please follow the e-mail at the bottom of the announcement, and we'll get back to you. Thanks very much for joining.