ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good morning, and welcome to ikeGPS Financial Year 2024 Financial Performance Review Presentation. From the company today, we have the company's CEO, Glenn Milnes; and the company's Chief Financial Officer, Brian Musfeldt. Before I hand it over to Brian and Glenn to go through the presentation up on the screen, I'll just remind you that you can submit questions through the Q&A panel at the bottom of your screen, and we'll endeavor to get to those post the end of the presentation. Glenn, Brian, I'll hand it over to you. Thanks.

Thank you, Simon. Thanks, everyone, for taking the time to join in terms of the financial performance overview in our FY '25 outlook. So as we start, please take note of this important notice. The -- what we'd like to focus on today is the FY '24 performance headlines that are now audited. I'd like to take some time to talk about the FY '25 outlook and where we are going. And related to that is what's happening with product updates and product releases tied to our AI product platform and our new SaaS products that we're bringing to market. And then we'll pause through the rest of it pretty quickly because the addressable market and the value proposition component is something I think most of you are quite familiar with. I want to leave lots of time for Q&A. So I'd like to introduce Brian Musfeldt. Brian and I are both based here in our Colorado, U.S.A. headquarters. Brian is going to take you through the first 5 financial slides.

Great. Thanks, Glenn. Yes. So subscription revenue continued to show consistently strong growth. We're growing 21% to $10.7 million in fiscal year '24. This growth was driven this year primarily by sales of our IKE Office and our IKE Office Pro products. And the company expects significant growth from this segment in '25 as well. And that growth will be driven by not only continued growth from our IKE Office products, but from the successful launch of our Q3 and Q4 sell-through of the new IKE Office PoleForeman products. And we discussed this in previous meetings, but since the Q3 launch of our IKE PoleForeman products, total contract value in closing has exceeded about $12 million. This is mostly from Tier 1 electric utilities in the U.S. market. This represents about 47 customers who subscribe to the platform, and 28 of these were existing customers and 19 are new. And one of those new customers is one of the 10 largest utilities in the U.S. So again, we're seeing great traction in this product as it goes to launch. This product, as of year-end, had about 2,700 new license seats in place. And as at 4/30, we were up to 3,700 licenses. So again, we're seeing a great uptick in this product. We're seeing great multiples on the conversion. So the combination of the growth of that IKE Office and IKE Office products, combined with the launch of IKE PoleForeman really do give us confidence that subscription revenue will grow 50%-plus going into fiscal year 2025. Moving on to transaction revenue. As we previously discussed, our platform transaction revenue was down 61% to $7.3 million in fiscal year '24. This reduction is on the back of a record year in transaction revenue in fiscal year '23. We had 3 customers in '23 who have really large outsized growth, which really resulted in 191% revenue growth from fiscal year '22 to '23, as you can see on the slide. And although that '24 transaction revenue was down year-over-year, the long-term trend continues to show growth in this segment. If you look at the longer term, this segment has grown 47% -- at a 47% CAGR since 2021. And when we look at the guidance from our long-term customers as well as the continued investment in broadband in the U.S., we do expect this segment to start growing again into fiscal year '25. So when you look at total revenue, total revenue did decline about 31% to $21 million -- $21.1 million in fiscal year '24. But the long-term trends remain positive. The company has a 3-year CAGR of about 31%. And recurring and reoccurring transaction revenue, which is the revenue we're really looking to build in this company, continues to dominate the mix, representing over 86% of the revenue for fiscal year '24. In addition, the continued growth of our existing software offerings, along with this IKE PoleForeman offering, really do give us confidence and expectation to resume healthy growth into fiscal year '25. So moving on to the P&L slide. We've covered revenues, so I'll move quickly on to the gross margin. But our gross margin did decline about 22% or $3.7 million in fiscal year '24. As we discussed, this is really primarily a result of the platform transaction revenue declines that we discussed previously. Conversely, the gross margin percentage increased from about 53% in fiscal year '23 to 60% in fiscal year '24. This increase is a result of the platform subscription revenue, which, again, that segment will generate over 86% gross margins. So we do expect to see continued improvement in our gross margins going into '25 as subscriptions revenue will continue to become a larger portion of the overall revenue mix. In addition to that, remember, we had cost reductions executed in Q3 of fiscal year 2024. And those -- the benefits from those really only were reflected in the Q4 numbers for fiscal year '24, but we'll see the benefit of those for the entire year, fiscal year '25. And lastly, the company -- we've discussed in the past, but the company has built out and trained contract resources in Mexico. This group will allow the company to execute platform transaction revenue at a much lower cost, which again, will help improve margins as we go forward into '25. We move on to operating expenses -- I'm sorry, Glenn, a little more on that last sheet. I'll discuss the midyear update. The company reduced IKE's cost base in Q3 of fiscal year '24. And that really was to maintain the time towards both EBITDA and cash positive operations. We regret and we had to review that. It was about 19% of the employee base. And most of those impacted roles were the U.S.-based back office and platform service positions. So again, that reduction will not only improve our gross margin, but will reduce our operating expenses into fiscal year '25 and really will help accelerate the time frame to reach EBITDA positive. The company did continue to make increased investments in sales and marketing in fiscal year '24. You'll see that we increased spend by about $2 million or 26%. Just wanted to point out again that due to long sales cycles in the utility markets and the size of the customers we're trying to attack in the utility and the telecom markets, the company really expect to see the benefit from these increased investments in '25, which again, will lead us into that confidence of where the growth will come from in 2025. The company did decrease R&D spending a little bit in 2024 by about $1.1 million or 10%. The reduction of -- this was really done through a reduction in outsourced engineering and really through transitioning our engineering base of the company at lower cost regions, which includes our own New Zealand location. So we do continue to make significant investments in product development. We do see that as a key investment for continued growth of the company, and you will see continued investment in that in '25 and beyond. So those combinations did -- led to our net loss. Net loss did increase by about $7.2 million in fiscal year '24. But as discussed, that was really 3 key factors: the $3.7 million reduction in gross margin driven by the transaction revenues; a reduction in noncash items, think about foreign exchange gains and losses and movements of fair value assets and liabilities really did result about a $3.3 million of income in fiscal year '23 that didn't repeat in '24; and then the increase in our investment in sales and marketing. I think that covers the P&L, Glenn, we can hit to the balance sheet. Yes. So on the balance sheet, I just want to keep this quick. But management, we do continue to emphasize the importance of a strong balance sheet. And although we did utilize cash in '24, the balance sheet remains healthy, and we do continue to manage the business towards EBITDA breakeven in the second half of 2025. The company ended the year with about $15.4 million in receivables. That was a decrease from the year ended 2023. If you look at what drove that decrease, it was primarily driven by 3 items: $4.5 million was used in operating activities, which we talked about significantly from the increased investment in sales and marketing; $1.7 million was from purchases of PP&E, which are primarily represent the addition of IKE rental tool assets that relate specifically to the sale of our platform subscription revenue; and lastly, about $2.2 million in spend related to development of our new product software offerings. So again, these are really intentional and focused investments in the company and what we think is necessary for the growth. But I'll turn it back over to Glenn just mentioning again, strong balance sheet position, we believe will get us to -- no need to raise capital in the future. So over to you.

Thanks, Brian. And Brian will be available at the end of the presentation for Q&A as well. This is the same key metrics table that we published last month. So I won't go back through all of these key items. But as a company, this is the -- how we think about our value and our growth over time. It's really around winning more subscription customers. It's putting more assets and engineering analysis through our software platform. So what I did want to do is spend a little bit of time talking about what we've been investing in, I think why it matters and also why we feel extremely optimistic about FY '25 and FY '26 and beyond. To Brian's point, we address the North American electric utility and communications market. These are the biggest infrastructure companies in the world. We target the largest ones, and we compete against some really big competitors. But I just want to explain how we're differentiating ourselves, and why we think the traction we're getting matters if we take a 2-year, 5-year, 10-year lens of the IKE business. So Brian mentioned this, we expect that subscription revenue in FY '25 is going to grow 50% or more. It's based on 2 things. We've got ongoing growth of our core IKE Office Pro subscription product. I'll show you what that product is in a moment, but our retention rate is exceptional around IKE Office Pro, greater than 95% retention rate. The other major item has been the sell-through of our new next-generation IKE PoleForeman product. As Brian mentioned, now more than $12 million of total contract value closed since we launched it towards the end of last year, more than 3,700 new subscribers. And these aren't subscribers, not like subscribing to Netflix or LinkedIn, these are engineers who are basing their work on the standards of some of the biggest utilities in the country. And we think this is such a sticky long-term customer footprint, it's a really exciting item in terms of where we're getting to with IKE PoleForeman and we'll talk to that a bit more on the way through. We have these reoccurring transaction revenue profiles. That's the part that's caused us a bit of hard burn through -- if we look at our growth rates for the last 4 years have been strong, but we came back on the transaction revenue piece from FY '23 to FY '24. These tend to be communications companies or engineering groups that are just matching their variable cost to the use of our software. They go fast and they go slow. I think we're going to have both upside and downside risk through this year and next year. But overall, we haven't lost any of these customers. They pull up and down, and we have to be prepared to, I think, as a business, to explain the profitability of this revenue stream, perhaps versus the headline revenue component. So I won't go down all these points. The beta, we closed $27 million of new contracts through the '24 period against $20 million of -- $21 million of recognized revenue, gives us a lot of momentum into this year. And our sales pipeline is strong. We keep winning about one new enterprise customer every week here in the North American market. We are winning. We're starting to display some big competitors, and we're just lucky. The macro market tailwinds across this North American electric utility segment and comm segment is right behind us. So there's probably a 2-decade tailwind in terms of network capacity, grid hardening to electrify the future of North America. And we play a small part but an important part in that story. So we feel like we're in the right place at the right time. So I'll go pretty fast from here because I know there's a bunch of questions to cover. So we position IKE as the pole OS company, the pole operating system company. And we're looking to provide a suite of products that deal with the end-to-end engineering of a network, from network planning to assessment and digitization to network design to network maintenance and capacity and grid hardening. And so we're building these products that link these things together. We've got like IKE Insight around planning. We've got IKE Office Pro. It's our core product for digitization, digital twin assessment. And then we've got IKE Structural, which is all around the design and structural analysis of what we do. And then the technology service we offer is called IKE Analyze. So that's where customers use all our technology in the field, but they use us to analyze their information. And that's what we're automating through AI, et cetera. And we intend to keep building out this portfolio of product offerings, including training and education. Not because we want to be a training business, but because we want to educate our customers. Education is the modern way of selling. So that's the suite of products, and we expect to expand it over time. Now I'll just talk a bit to what we've actually done in terms of investment into product. The most important thing, I think, for shareholders and investors looking at IKE and kind of where we sit today is what we've done with IKE PoleForeman. We acquired this legacy product in 2019. By the end of this year, revenue will be more than 10x where it was when we acquired that business. We've launched a new version of the product with a pretty amazing customer council helping us to specify their requirements. As Brian mentioned, now more than 3,700 engineering users added to the platform over this last period of time. And this is super sticky. It's a super sticky sales model. If we deliver well to these customers, we'll keep these groups for decades. So we're really excited in terms of the customers that we're closing. We expect by the end of the year, we'll have 8 of the 10 biggest electric utilities in all of North America standardized on IKE PoleForeman. And this is how they design their whole distribution infrastructure. This is engineers using the software every single day to design every part of their engineering network. So this really matters. And we think this is a super valuable asset. There's only 2 other standards in the country. We've already displaced one of our big competitors in the Northeast of the U.S. We intend to go after the whole market with this product. We think it's the best in the industry. The second exciting thing. We tend to be conservative in how we talk about AI because it's been a lot of AI promises that haven't been delivered. But we've worked with Google and some other big data companies to figure out how we can do whole of network analysis specific to power poles. And this is coming to market next quarter. It gives, in this case, a communications company, the ability to work out where they can go and attach a fiber network. Where is it going to be easy, where it's going to be hard, where it's going to be expensive versus sending people out into the field to assess tens or hundreds of thousands of assets. We can do this with computers. And so this is coming to market. It's been a big investment for IKE. And that's -- you see it in the R&D line, in our P&L, but we're excited about some of the lead customers that we're now working with around IKE Insight. And lastly, this is a minor item, but we've got a noncore asset called Spike. And we've launched a SaaS product for the signage industry called Spike SignPilot. So that's -- we serve about 5,000 sign businesses in the United States through the Spike business. And we're bringing them a software offering, which can, if we're successful, can make a big impact in terms of what that revenue model looks like over time. I think probably the biggest item from my perspective, certainly, is how we keep strengthening our team. We're a North American-based business. We sell to the U.S. market exclusively. Been really lucky to bring on some great people through the last 12 months. So Roz joined us as a non-Executive Director. So Roz was one of the most senior leaders at Trimble here in the U.S. and also at Oracle and Oracle Utilities. She is a pretty amazing person in terms of market knowledge and particularly around product and go-to-market strategies. Brought on Ani as our Chief Marketing Officer, with lots of experience in our industry. Brett Willet. Brett Was the CEO and President of SPIDA Software, which is a direct competitor of IKE and IKE PoleForeman. They were acquired by Bentley Systems some time ago. We brought Brett into the team to run our product management. He's an incredible guy. And you have met Brian. So we're delighted to have Brian onto the team as well in terms of his experience, in terms of the industry itself and also with a range of other things, such as M&A. So from here, I truly will go super fast because I think these slides speak for themselves as I read through. But we're lucky to be in the right place at the right time. The U.S. market is just exploding. There's another 25 years of grid resiliency and grid capacity investment going to happen. We help these projects happen faster, better. We digitize the process. We're certainly part of the future in terms of productivity for the electric utility market. The spin on distribution infrastructure is just phenomenal. It's dominated by the investor-owned utilities, and there's 106 of them, and there's another 3,000 utilities that sit behind them. They're spending a lot of money on grid capacity, grid infrastructure, grid hardening, so they don't cause the next fire, the next outage or fall over in the next storm. And again, we always post the slide for our Australian and New Zealand audience just to get the scale of how big this North American market is, it is really so significant. We're in 26 of the 106 biggest utilities in the country today, but we haven't even scratched the surface in terms of the market opportunity. This is a map of the investor-owned utilities that operate across the United States. They're generally publicly listed companies with a profit model. And then sitting behind them, there's another, close to 3,000 municipal or cooperative electric utility customers. They are all targets for IKE products in terms of what we offer and what we deliver. It's the same proposition, whether we're talking to the biggest utility or the smallest. And it's taken some time and a bit of a sense of humor, but we're winning. We're now in 8 of the 10 largest investor-owned utilities in the United States. We land, then expand. We sell one product and we sell more of our integrated products over time. Yes, a huge growth opportunity for us. And we're winning about one logo a week at the moment. The second part of the market, again, I'll go through this really fast, is tied to the communications side of things. So fiber companies are putting fiber on to power poles, power infrastructure. Most of it's going overheads. Huge amounts of investment over the next 5 to 7 years. And again, we just help this process go much, much faster. We digitized the assessment process. We dramatically speed up the attachment process for communications company. Same products, but different value proposition. And the investment is just growing over the coming 5 years or so. And again, we're lucky to be now in several of the -- just the very biggest comms companies in the country. Crown Castle was the biggest shared communications infrastructure group in the world. And AT&T is the biggest mobile operator in North America. And we see those in a whole host of other Tier 1, Tier 2, Tier 3 communications groups. But again, we're still at 5%, 6% market penetration at this time. A big total addressable market. This is a top-down view of what's being spent on distribution network development. We play a part in productivity around this item. It's really important to be in the right market at the right time in terms of rising tide, et cetera. So again, we're grateful to be able to sort of play our part around the success of the people that are doing this work. Some more data there on the market tailwinds over the coming decades. This is in the short-term upswing. I think it's something that's just going to become more intense over time. So again, we're looking to play our part and build software tools that really help customers go faster. We go to market directly. I think most of you know this. We're trying to build the best customer experience, the best brand in our whole industry, bringing like a modern consumer brand to a very defensive, slow-moving industry. And it's really starting to work. We sometimes highlight some of the brilliant young people that work within IKE who are industry experts. And that matters a lot to us in terms of how we remain super sticky with our customers. Lastly, I'll finish up fast, Simon, so we can go to Q&A. Just wanted to provide a picture here of -- this is just a snapshot of how customers are using our software in practice. This is the breadth of how they're deploying networks using our tools and our software. So this is Crown Castle in Florida, all these different markets where they're putting poles on the ground. This is the whole United States and North America. This is AT&T and just 7 states where they've got like IKE Office deployed an IKE PoleForeman deployed. But just trying to paint a picture of the scale with which we start to reach across these customers, and we hope why we can maintain a very long-term relationship with these groups. And so as we look forward, we're optimistic. I think having had a real next year, to be honest, in FY '24. We had transaction revenue come down. That was tough because that wasn't what we had expected from customers that were running at a really fast rate at the start of the year. But generally speaking, we feel super confident about what's happening now with cross-sell, upsell opportunities. The way that we're expanding across customers, we've got an international footprint opportunity over time and also M&A, we've had 3 really strong acquisitions to date. And I'll pause there, Simon, and open things up to questions.

Thanks, Glenn. Thanks, Brian. First question, expenses of $28.7 million in financial year 2024 seems high versus revenue. Where do you expect expenses to rebase to in FY '25?

I'll take that one. Remember, so we mentioned we did that cost-cutting kind of in late Q3. So the impact of that cost cut really felt for the company kind of midway through Q4 as we got through all our severance and other payments. So that cost-cutting, let's say, it was about $4 million annually. And we only recognized about a quarter of it. So I would say if you think of it that way, we'll reduce that cost-cutting. We will see some increases mainly CPI. We're not going to make a heavy increase in head count or anything this year. We really made that investment last year. So if you factor in that cost-cut and then kind of factor in a CPI to 3% to 4% increase, that's probably where we'll rebase for this year.

Thanks, Brian. At to the progress of IKE Insight, you over quantified the level of revenue we expect from the Insight product over the next 2 to 3 years.

Yes, it becomes an important part of everything that we do. So think about it a little bit like Microsoft Copilot. The biggest opportunity initially is to put automation and AI capability into the hands of customers that are already using software. That's what we intend to do. So we just made customers much, much more productive, and we intend to flow that through to price increases in terms of subscriptions. At the same time, we're launching some new planning tools such as network viability. We think this matters a lot that any business that's trying to figure out how to go and put a network out in a new city or a new province or new territory. So yes, we're really excited about where we've got to. One of the -- AI has been overhyped for a long time, but one of the great benefits you can have if you specialize in a problem or an application is the training data set and for IKE, we've got tens and tens of millions of poles that have been engineered by human banks, human engineers. And it's an incredible data set to be able to do very specific things. So that's how we intend to introduce new subscription products.

Thanks, Glenn. Thanks, Brian. Just a continuation of that question, will that be a subscription model or additive transaction revenue?

Well, it depends on the customer. And I think, again, this is an important contextual point. Some of our customers operate on a transaction basis. So if you're -- Crown Castle, they like to run their variable cost associated with the volume of the engineering they're doing. And so they want to buy on a transaction basis, a per asset basis because then they can match their variable costs with their variable revenue. Other customers, most of the utilities, they prefer to buy on a subscription basis. Would prefer to sell on a subscription basis also. So that's where -- they are happy to lock in like an annual subs fee per user. So it really depends on meeting the market requirements. And I think that's an important thing for our investors and shareholders to understand. We're meeting market requirements. We're not completely able to dictate the revenue model.

Great. And can you discuss how the acquisition of Marne & Associates has contributed to the FY '24 result? And what role that will play in the future?

It's been brilliant. And we're so lucky to have had the opportunity to partner with Marne, David Marne and the Marne & Associates business. For those that don't know, this is a company that's been in practice for 30 years in the industry. David Marne sits on most of the whole bunch of committees by the regulatory standards boards, an amazing person. And it brings to life and it brings to life training around the National Electric Safety Code and health and safety standards. If you're building power poles and power infrastructure. It's quite hard to do that, Simon, to make that really engaging. So we've been so fortunate to bring him into IKE. We've trained -- we're a long way ahead of plan in terms of the number of customers we've trained. And for us, it's around, it's IKE being in front of hundreds of engineers of the utility, talking about a subject that they're really interested in. And then at the end of it, we get a chance to talk about technology and ways of doing things better and faster. So it's a pathway to market for us in the medium term. But it's a great way to get credibility and engage from top to bottom of these massive utilities that can be quite hard to access otherwise.

And of these 8 of 10 largest utilities that use IKE, do they also use IKE competitor products or use IKE exclusively?

No. I mean all utilities use, they use everything. But they standardize on particular products and programs over time. So of those 8 of 10 that we're talking about, that they're all standardizing on IKE PoleForeman and for structural analysis and design. And that's really key because all of their engineering and decision-making flows from that platform. So that matters a lot. But utilities are always trying different things and different products and different licenses. It's a whole different story when they make a standardization decision, which is what they're doing with us at the moment.