ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good morning or good evening, and welcome to ikeGPS' performance update for the fourth quarter and for the financial year 2024 to 31st of March. On the line, we have the company's CEO, Glenn Milnes, and we'll shortly be joined by the CFO, Brian. [Operator Instructions] Glenn, I'll hand it over to you to get started. Thanks very much.

Great. Thanks, Simon. Thanks, everyone, for taking the time to catch up and hear our performance update. What I'd like to do is focus in on, obviously, the headline results for FY '24, talk about some important product updates and information and also some market components. And then we'll pulse through kind of what we do in the market we serve, et cetera. And I know many of you know that quite well. And it would be great to get to Q&A and take the conversation from there. So please take note of this important notice. Just mentioned the items that it would be good to try to highlight before we get to Q&A. So from an FY '24 perspective, it's a bit of a sort of a 2 sprint discussion. Our core revenue business has continued to grow really strongly and substantially. We've had volatility in terms of the transaction revenue that we generate. And keep in mind, our business model is kind of an end model. All of our customers sign up to subscriptions. We offer value-added transaction capability that sits on top of us. And we'll talk a bit more about how that pulsed through this year. But our expectation is for really healthy growth into the FY '25 period, and I'll talk about why to follow. From a subscription standpoint, again, that's just been consistently strong. The good news, I think, is that as we look towards FY '25, we expect that this will increase materially further based on the new products that we've launched and sold. So we've sold through more than $8 million of PoleForeman contracts through Q4 of this year. We recognize that revenue over time, so you see that flowing through to recognized revenue in FY '25 and beyond. And our core IKE Office products, our retention rate is really strong, 95%, 96%, continues to grow strongly. So I think we're in good shape from a core subscription revenue perspective. The transaction side of things -- as I said, it's like a 2-speed story here. We had incredible growth in FY '23, I think almost 200% growth on FY '22. Although the overall profile is still healthy, this ticked back down by 61% through this year. This is lower margin revenue in terms of our overall contribution to margin. But we had 2 or 3 large national communications companies that went gangbusters in FY '23 that slowed down materially in FY '24. We haven't lost any of those customers. The 2 biggest ones have still put through $1 million or so of revenue through FY '24, but it was slower than we had seen, obviously, in the FY '23 period. And I think the volatility around the transaction piece of what we do is an important consideration as we look at FY '25 and sort of future periods. It's an important part of the value proposition for what we do. It's like an add-on to the subscription piece. It presents some real upside and down -- or not downside risk -- some upside risk for FY '25. We always publish this key metrics chart. I won't go through it line by line. But here is the details in terms of understanding transaction review, a number of customers and the subscription and other revenue components of what it is that we do. From a new product update perspective, there's, I guess, a couple of key takeaways in terms of where we're at. So we've built a next-generation structural analysis product called IKE PoleForeman. We launched it in Q3. We had a pretty amazing customer council sitting behind it that helped us design the products, 7 of the 10 largest utilities in the country that helped us build it. We've had a really successful sell-through in Q4. So that's the good news. We're now at more than $8 million of total contract value from 42 customers through Q4. There's 19 new customers, and that's included one of the largest electric utilities in the country out in the East Coast that were flipped from a competitor and its 23 existing customers that have flipped across the new platform. So lots of runway in terms of how we keep building out IKE PoleForeman. And the context here is that this really matters. If you're an electric utility, your design team are using the software every single day for designing their infrastructure and network. So the largest customer we've closed have got more than 1,000 engineers using our software every day for distribution network design. So we're excited about differentiation and capability that otherwise doesn't exist in the market around this space. The second item just to highlight or go fast on this. We've got a noncore asset called Spike, which serves the signage industry in the United States. We've launched a new SaaS product called SignPilot. Recently, it's $1,000 per user per annum or thereabouts. And it's leveraging more than 5,000 signed businesses that use our Spike hardware every day for the site surveys and the signage industry. So early days, but a really great reception, some really interesting adoption of SignPilot through this Q4 -- late Q4 period, which I think could become relevant to how we think about our SaaS footprint. From an FY '25 outlook standpoint, yes, it feels like we're in a healthy spot. So balance sheet-wise, we closed the year with a little over $10 million of cash and $4 million to $5 million of receivables. That's up from where we were in December of 2023, and it's about the same position that we were in the middle of 2023. So the balance sheet is really healthy. We expect the subscription revenue base to just grow strongly. And it's based on closed contracts. It's not sort of hoping about where we are. So IKE Office Pro just keeps growing. We've had more than 30% CAGR through these past 3, 4, 5 years, really strong customer retention. And now we've got the sell-through of the new IKE PoleForeman product in terms of closed contracts from big customers making big commitments to the product. It's very, very sticky in terms of the IKE PoleForeman product in terms of we go in and train hundreds and in some cases more than 1,000 engineers of these utilities on using this design program. So it's not impossible for any of these customers to flip, but it's hard if we do a good job. Transaction revenue, we expect it to grow. We've got a number of quite interesting pipeline opportunities on the transaction side, but this is higher risk. So we've got a wider range in terms of how we see the transaction revenue outcome for the year ahead. And the pipeline is strong, strong and growing. We're winning about one new enterprise customer every week in the U.S. market at the moment, and we expect to kind of keep that run rate going. And I think probably the most important thing is just the whole macro market. So we talk about in slides to follow the size of the market and the investment going into distribution networks across electric utilities and comms companies. Of course, we're not saying that we can address those whole numbers, but this is an activity that's just growing and growing over the next probably 1, 2, 3 decades. So we're likely to be in the right place at the right time in terms of productivity tools. So from here, I'm going to -- in the interest of time, I'll accelerate because I know that a lot of you on the call understand kind of the core value proposition of IKE, where IKE is the PoleOS company. GE -- recently rebranded as GE, the GridOS company, which is fascinating. But we have IKE PoleForeman in terms of structural analysis. We have IKE Office Pro, which is around the digitization of network assessment. And we have IKE Insight, which is being able to, at scale, use AI and automation to process bulk data. And there's some really interesting updates coming on the IKE Insight side of things. And then we have this IKE Analyze capability to provide automation for customers using our products. We process some of the data for them and give them that engineering information. But it's a big market, 3,000 electric utilities in the U.S., more than $200 million distribution assets. The common challenge in this entire industry is around grid resiliency, so not having a network fail in a storm or in winds, causing a fire, network outages. The second big challenge is around grid capacity. So how do you build enough capacity into the electrical grid to fuel the electric vehicle market? The U.S. has got to move from 20% of the nation's power to 50% onto the electrical grid over the next 20 or 30 years. Lots of regulatory risk. Lots of legal risk for our customers. And so we improved the engineering design and maintenance process. The spend is massive. This is just an example of CapEx into the electric utility market across the whole country. It's growing at 3%, 4% or 5% per annum right through until probably 2050. So it's a growing market, growing problem. And just trying to provide here a snapshot of just how vast this market is that we're addressing. So this is a view of the United States, and these are -- there's 109 investor-owned utilities. These are the biggest players in the United States today, where we have some kind of footprint of sales into 29 of these companies, but we've only just touched the surface in terms of penetration into most of these groups, but just to get a sense for the scale of these operators. And then if you layer on top of this, again, this is the United States, another 2,800 municipalities and cooperative electric utility companies. These are all opportunities for us to sell products into over time. We're starting with the biggest in terms of who we target, but the market is really significant. And yes, as I mentioned, we have 6% of the logos in the country today. 94% of it is still greenfield for us in terms of going and winning other customers. It's taken time and a bit of a sense of humor, but we're now in 8 of the 10 largest investor-owned utilities in the United States. We haven't even got close to fully penetrating these customers. Once you go into a certain part of a utility, there's opportunities to go into many other functions and disciplines within a utility customer. So really large. They call it white space opportunity, which means account growth once you get through the door, if you can deliver a great customer experience. And then beyond this, obviously, the opportunity to expand into international markets. The second big market driver for us is around fiber, less so 5G in terms of how that's slowed down in North America. But fiber is going at $100 an hour, more than 100 primary and possibly 200 other communications companies building fiber networks across North America, trying to go as fast as they can. And we help speed up the network deployment process. So again, some examples here, the big numbers just shows you the investment level that's going into fiber network deployment. And again, we can help some of these customers go faster. We've won a few of them, but we've got a long way to go. Crown Castle is the biggest shared network communications network company in North America. They're a core customer that has standardized on IKE now for all of their network design. And we've got footprints and others, AT&T, Bell up in Canada in particular and others. So it's another big macro market tailwind, which we're fortunate to be sitting in behind of. Yes. So it's a big TAM in terms of how we think about the activity that's going on that we support. We're not suggesting here that's a revenue potential for IKE in the next short period of time. But that's the level of activity that's happening around the space that we support, and it's growing and growing. So yes, again, from a market tailwind standpoint, the thing that has become new in terms of market tailwinds has just been this dramatic shift of electric utilities. They need a -- they need grid hardening, so the networks don't fail in a storm, cause a fire, et cetera. The second thing is they need grid capacity like way more power needs to sit on the distribution grid. Again, we help assess and design that entire process and do it in a digitized, high quality, faster, better way. And so that's a requirement that will -- I think will sit between now and 2050 if the U.S. is going to meet their goals in terms of distribution energy networks. We go to market directly. We deliver a direct brand and a direct customer experience. It's a relatively small team that is very highly capable of just industry experts that help our customers do things better. We focus lots and lots on customer experience. There's some examples here on what does our software look like in practice. This is Crown Castle deploying fiber and Florida, I think. This is the way our customers are using our tools and our software at a macro level. This is AT&T using IKE across the whole country, but an example here of 7 states where they're deploying fiber and how they're tracking projects just to try to give an idea of the scale of what we're doing. So lots of growth potential. We've got to execute well from here, but it feels like we're moving things in the right direction. And Simon, I'll stop there, and it'd be great to take questions.

Thanks, Glenn. [Operator Instructions] Just regarding the 19 new IKE PoleForeman customers, have these mostly flipped from other structural analysis platforms? Or are they mostly adopting a structural analysis platform for the first time?

It's a mix. The biggest one has flipped from a competitor that used a competitive product called O-Calc for 15 years, and they've come across because of the simplicity and elegance of IKE PoleForeman. So that's exciting. They're a huge business on the East Coast. Others, it's a mix. And the really interesting thing about standardization by utility is the ecosystem effect. So if you're a big utility, say you're a Duke Energy, the biggest utility in the country, they're an IKE PoleForeman user. They have many, many engineering companies that have to deliver data into their network. And so they just require now IKE PoleForeman. So that's sort of a forcing function for folks to make a shift.

Thanks, Glenn. Can you provide some more detail on the likely split of the plus 50% growth in terms of IKE Office Pro growth or former contracts, which have already been signed? Any other expectation of further contract wins for PoleForeman?

We haven't set that out just yet, but there's some good analyst views in terms of kind of how that will break out, and we're pretty comfortable with those. I mean there's a big uptick with IKE PoleForeman, which I think is positive. And again, for context, 4 years ago, the legacy PoleForeman was about $0.5 million per annum business. We've launched this new platform, raised pricing 5 to 10x based on capability. And now that's much, much higher level.

Just a generalist question around just the TAM of PoleForeman. How do you sort of look at that? This question just says that maybe there's 20,000 utility distribution engineers as a best guess, let's say, $4,000 a year. Is that the best way of looking at it in terms of an $80 million ARR opportunity per annum?

It's one way to look at it. There's many more engineers than that though. I mean just one of our big utility customers have got 1,300 users. That's just one utility. So yes, the number is bigger than that. But it's a good way of thinking about it in terms of TAM. The other thing would be our best estimate. So within our business, we have Malcolm Young, who is the CEO of PoleForeman. And we've recently hired Brett Willitt, who was the CEO of SPIDA Software, SPIDAcalc. So there's only -- there's 3 core players in this industry. We think more than 50% of the market haven't made a standardized decision on pole loading. So it's -- there's a lot of opportunity over the next 1, 3, 5 years in terms of new market development.

Thanks, Glenn. Are you able to provide any color on the magnitude of cost out initiatives that were executed in the second half?

Brian, you might want to cover that one if you're able to -- Brian had some trouble getting in.

Yes. I think he might have had trouble. So we'll check that one on notice. Just next question just in terms of the competitive landscape in IKE's core markets.

So it differs depending on the product. So in terms of IKE Office Pro, that's our core product that generates most of our revenue today. And we mostly compete against manual work process. I mean really sophisticated, smart people doing things really well but using manual methods in terms of sticks and hot sticks and laser range finders and various other things. That's the primary impediment for us in terms of adoption, and it's harder than you might think to move utilities away from things that have worked for them for decades. There's a couple of other technology companies. But we -- for the time being, we're winning against those. With IKE PoleForeman, we compete against 2 primary folks, one is called SPIDA Software, and they were acquired by Bentley Systems last year or the year before. The other one is called O-Calc. It's owned by a company called Osmose. It's like a 100-year-old national engineering services business. It's a $1 billion company. There's the 3 of us essentially that go after distribution design as a standard.

Thanks, Glenn. And is it seen as a challenge that IKE doesn't have a transmission design product?

Transmission is a whole different story. So we don't play in transmission at all, and here's the reason why. Utilities sort of divide -- the big companies, big infrastructure companies, they're divided into sort of 4 parts. So they have a generation division. Then they have transmission. So those are the big -- the massive towers and things that move power from generation to wherever the power needs to go. And then distribution is everything that happens once you had a substation and go into towns and neighborhoods and cities and businesses. The fourth is outage management, which is utilities obsessed with safety and reliability. And they have a division around that. So we sell and deliver only to distribution. Yes, really different requirements, quite underserved in terms of technology, completely different buyer personas. It's like selling to a different company, more or less. So yes, we're just very focused on distribution.

Thanks, Glenn. How should we think about the potential upside to $16 million in FY '25 subscriptions from new contract wins in the period with regards to end user budgets, timing, training, et cetera?

Yes. Great question. The nature of the subscription piece of what we do is even when we close these big contracts, it depends on timetables. We recognize revenue over time versus at the time of contract close. So yes, we're excited about the broader opportunity and what we should be able to do through this year has set us up for another big uptick in FY '26.

This forecast of expenditure growth of the utility industry, how does this growth potentially equate to growth in transactions? Is it 1:1 or a different type of calculational ratio?

It's different because with our transaction business, customers pulled us into the transaction side of what we do. They're looking for help. They want technology and automation and capability to do parts of the engineering process just faster. They don't have enough people to do things quickly enough. So I think it's going to depend in the short term. Our transaction business will be driven by the communications market. They're attaching fiber. They don't have a lot of engineering capability in many cases. So as we expand that communications footprint, I think we'll see growth in transaction revenue there. I think in the medium term, the electric utility market just need lots of help in terms of capacity. So I think take a 5-year lens, most of our transaction revenue will come from the electric utility market, but it will take some time to transition from communications to the utility side. And we've had a couple of early proof points actually out of the utility market, especially when they start to really trust us with what we're doing with the software.

Thanks, Glenn. And can you just talk to why so confident in FY '25 SaaS revenue growth going forward?

I mean now it's just based on its closed contracts. So we closed a lot of significant contracts through Q4. Very little of it is recognized revenue for FY '24. It will all be recognized into FY '25. So yes, it gives us lots of confidence in the FY '25 number.

Thanks. And just one final one on PoleForeman. Have many of the -- or any legacy customers to clients take out the next-gen product? And how many legacy customers are there?

Well, anyway, touch wood no, none. I mean we've built the product with a customer council as 12 of the biggest utilities in the country plus AT&T. And that helps in terms of vested interest. And so far, we've managed to convert everyone. But I hope I'm not hexing it here. And that broader footprint is about 140 customers, and they range from big to obviously really small businesses. So it's not a one size fit all item. But we're optimistic. I mean we're hopelessly biased, but we think we've built something that the market really needs in terms of product market fit. So yes, it's exciting. It's taken us a while, but we're there now.

Good. Thanks, Glenn. That concludes the Q&A. I might just hand it back to you for closing remarks.

Thanks, Simon. Thanks, everyone, for joining the call. Again, I'd be happy to cover follow-on questions at any time. But otherwise, we look forward to being in touch into May with audited results.

Thanks all for attending. Thanks, Glenn.