ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Hello, and welcome to ikeGPS' First Half of Financial Year 2025 Financial Performance and Update released on the market this morning. From the company today, we have the CEO, Glenn Milnes; and the company's Chief Financial Officer, Brian Musfeldt. [Operator Instructions] But Glenn, I'll hand it over to you. Thank you.

Great. Thanks, Simon. Thanks, everyone, for taking the time to catch up. We've had a really strong first half of the year. We've had a really strong sort of October and period through November. So we'd like to talk to that. But we don't want to repeat what we went through in mid-October in terms of our performance update. So what we'd like to do is pulse through a lot of these slides reasonably quickly. Brian will take you through the financial slides and the financial data. I'll then update the meeting on where things are sitting in terms of October and November to date and be great to open things up to questions and conversations. So I'll take us through the slides from here. Just please take note of this important notice. The agenda is here as written. We won't go through the slides at the end of this presentation document. They should be easy enough to read in due course. But given we've got 25 minutes; we won't go through all of the material. So Brian, over to you, please, to take the team through performance for the first half to end of September.

Great. Thanks, Glenn. Yes. So just to note, all the financial information provided in this presentation, including revenue, exit run rate and gross margin for the period presented are consistent with the information provided during the October '24 first half performance update. As such, I'll only be briefly commenting on those areas already covered as we walk through the presentation. So starting with Slide 4. As stated, the first half of fiscal year '24 represented another strong period for IKE with a record $33 million in contracts closed in the period across 415 deals. We also saw the addition of 34 new subscription customers, representing approximately 1.3 new subscription customers per week. Our platform subscriptions continue to lead our growth. We ended the period with an exit run rate of annual platform subscription revenue of $13.2 million, an increase of over 34% from the same period in the prior year and recognized $6.5 million in subscription revenue, representing growth of 28% versus the prior period. Gross margin increased 31% over the prior period to $8.1 million, and our gross margin percentage increased to 67%, up from 59% in the prior period. This increase was driven not only by an increase in our high-margin subscription revenue, but from an increase in our platform transaction revenue margin percentage as the company continues to drive cost savings in our technology-enabled service offerings. Net loss was approximately $6.9 million in the period but included $3.7 million of noncash related items as compared to prior year, where net loss was $6.4 million, but only included $2.2 million of noncash related items. Cash used in operating activities was $2.6 million in the period, a decrease of 51% versus the comparable period in the prior year. And cash used in investing activities decreased to approximately $250,000 in the first 6 months of fiscal year '25 as compared to $2.7 million in the first half of fiscal year '24. As of September 30, our cash and receivables balances were $11.1 million, comprised of $6.8 million in cash and $3.4 million (sic) [ $4.3 million ] of receivables with payables of $1 million and no debt. As additional context, cash has reduced about $3 million over the past 12 months during a period of substantial investment into building new products and through a period of substantial recurring revenue and customer growth. With this, the customer does not -- or the company does not need to raise additional capital to fund continuing operations. Next slide, Glenn. So as discussed, platform subscription revenue continues to show consistently strong growth with a 3-year CAGR of 38%. The growth continues to be driven by a combination of growth for both our IKE Office products and the successful sell-through and new sales of our next-generation IKE PoleForeman subscription product. In addition, the company continues to maintain retention rates across all platforms of approximately 95%. Platform subscription revenue now represents over 53% of our total revenue, and our sales pipeline for new business is strong and growing. Slide 6. These figures represent the contracted annualized platform subscription revenue at the end of each reporting period or what we call our exit run rate. As of September 30, the company has over $13.2 million in exit run rate, representing 34% growth year-over-year, and we expect this to grow by approximately 40% or greater by the end of fiscal year 2025. Next slide. This slide summarizes the seat license -- seat and device licenses the company has under contract at the end of each reporting period. These licenses each represent an engineer actively using one of our subscription offerings. Seat licenses have grown over 179% in the last year, and we now have approximately 6,000 active licenses. Seat counts have recently grown at an accelerated pace due to customer additions and upsells as well as transitioning customers onto a new per seat subscription model when adopting the new IKE PoleForeman product. To date, 50 existing customers and 34 new customers, representing over 3,000 licenses have converted or adopted the new IKE PoleForeman product, which represents over $12.5 million in total contract value since its launch approximately 10 months ago. Next slide. Our platform transaction revenue came in at approximately $4 million for the first half of the year, representing a 3-year CAGR of over 20% and a 6% increase over the prior period. In addition, margins for our platform transaction revenue improved 107% from 19% in the first half of fiscal year '24 to approximately 37% in the first half of '25. This increase is due to software improvements and operational efficiencies made during late fiscal year 2024, allowing us to deliver these revenues on a more cost-effective basis. Based on contracts in place and strength in our pipeline, the company expects transaction volumes and associated revenue from platform transactions to build in the second half of fiscal year '25. But as consistently stated, timing and delivery of these transactions are customer dependent and therefore, variable. Next slide. As noted, our revenue and gross margin trends continue to improve, and our net loss, excluding noncash items, improved 26% from $4.6 million in the first half of fiscal year '24 to $3.4 million in the first half of fiscal year '25. The company believes these trends will continue into the second half of fiscal year '25 and beyond. Next slide. This table summarizes the key metrics we've historically reported over the past few years. We've covered these metrics on this table in the previous slides and note that all the metrics are tracking in line with our current expectations. This slide represents our consolidated statement of profit and loss that's now included in the financial statements we released last week. Again, we've covered most of the metrics on this -- on the previous slides, but I will point out that the company continues to make its significant investment in sales and marketing and research and development as we believe investment in these areas will drive the company's current and future growth. I note that R&D expenses increased 11% from $5.3 million in the first half of fiscal year '24 to $5.8 million in the first half of fiscal year '25. This increase is primarily the result of where our engineering team is focused in each period. As a reminder, development costs that are directly attributable to the design and testing of identifiable and unique software are capitalized. During the first half of fiscal year '24, our engineering team was focused on the development of 5 new products, 3 of which have now been launched in the market. During this period, $1.7 million, including both internal labor and external consultants was capitalized and can be seen in our statement of cash flow under cash used in investing activities in the period. In contrast, for the first period of -- first half, excuse me, of fiscal year 2025, as these products were now launched, a large portion of the engineering team shifted focus to the successful onboarding and transitioning of our customers onto these new products, resulting in only $32,000 of capitalization of internal labor in the period, and hence, increased R&D expense remaining in the income statement for the period. The company does expect the teams to resume additional product development in the later half of fiscal year '25 after completion of the transitioning of our customers to the new products. Next slide. This slide details our balance sheet assets. Just overall, from a balance sheet perspective, the company is at plan. Cash and receivables were discussed in the prior slides, but I did want to note prepayments. You'll see prepayments increased about $800,000 or 94% period-over-period. Prepayments are primarily made up of prepayments on inventory, software and insurance. The increase year-over-year is primarily related to timing of payments on inventory, resulting in increased prepayments and as you'll see, lower inventory. These amounts will normalize as the inventory is brought into the facility and recognized. Next slide. So this slide again details our balance sheet, but this is our liabilities and equity. And as noted, the company has less than $1 million in accounts payable and no debt. In addition, the company has $11.7 million between long-term and short-term deferred income as at September 30, 2024. As a reminder, deferred income represents consideration received for platform subscription revenue prior to the service being provided, which is generally provided over the 12-month subscription term. The majority of the company's contracts are 12-month commitments, but with the launch of the new IKE PoleForeman software, the company has entered into a limited number of 36-month and 60-month contracts with larger Tier 1 customers. We also want to note that these revenues when recognized, generally have margins exceeding 86% historically. And with that, I'll turn it back to you, Glenn.

Thanks, Brian. I'm sure there'll be some questions for you after I go through the progress update since we talked to investors mid-October. I just wanted to bring everyone up to speed in terms of where we sit coming towards Thanksgiving week here in the United States. So the good news is we've had continued sales momentum. So there is probably 2 important items to talk to here. Specific to our new IKE PoleForeman product that we brought to market at the start of this year, since the 1st of October, we've closed close to $3 million of total contract value of additional sales for the IKE PoleForeman subscription product. That's going to equate to an additional close to $0.75 million of ARR. These customers -- keep in mind, when we win them, we expect to keep these customers not just for years but for decades potentially. So it really matters that we're closing these Tier 1 electric utilities. And just to note also, these aren't yet fully contracted sales, but we expect to add another $0.75 million of ARR probably through the next week or 2 with 2 other large Tier 1 utilities just in a closing process, one of which we've officially been awarded the RFP and the other that's told us they're moving forward this week in terms of deployment. So it's a good story in terms of, I think, that ARR growth that we had anticipated through this year. And overall, as we look at kind of sales through to mid-November, about November 15, I think, was the cutoff date here, we've closed in total about $6.6 million of additional contracts to the $33 million we had in the first half of the year. And the pipeline is really healthy. We -- this market doesn't move fast, but they move very deliberately. So we've got good visibility into, I think, a pretty stimulating pipeline of further sales opportunities through the balance of this financial year. The second bullet here is really around what we're doing in terms of bringing AI and automation capabilities to the market. We've launched 2 new products in the first half of the year tied to really specific workflows for an electric utility, looking at ghost poles or twin poles, which are the biggest vulnerability in electric utility network using Google data through our work with the Google team and also automating some joint-use ticketing initiatives. But the exciting thing that's coming to market now is putting automation inside of IKE Office Pro, which is our core product. It's where we have our largest customer footprint. So this is going to speed up customers, make them faster, more accurate, more productive and better. And it's also an additional upsell subscription product into that platform. So we're excited to be introducing that into the marketplace. And I think it's an important step with an investor lens. And then the third point is really we've worked with a pretty amazing customer council for the last few years who have helped us build IKE Office Pro and have helped us build IKE PoleForeman. These are the standards leaders within some of the biggest utilities in the country. And the exciting thing is they're identifying more items for us to deliver and to them in a pretty efficient way, I think, and we believe will drive a lot more subscription product adoption over time. So yes, some energizing things happening through Q3 that we wanted to bring everyone up to speed on. And I think we'll probably pause here. The remaining slides were those that we covered in mid-October. And hopefully, they're readable and understandable as they're drafted. But I think it would be best use of time, Simon, if we can pause here and open things up for Q&A.

Thanks, Glenn. [Operator Instructions] But I've had a few come through already. Just a question regarding the company's need to raise capital for business-as-usual activities, noting that $3 million in cash has been reduced in the past 12 months.

I think the...

So I guess the question is, does the company need to raise cash?

No. From a business-as-usual perspective, we're in really good shape. Hopefully, everyone can see that we're growing revenue. We're growing gross margin from an absolute and percentage basis, and we've reduced costs. So I think we're in very good shape. And the balance sheet is strong. And as Brian mentioned, is fully on track and on budget for this year.

Great. Thanks, Glenn. And are there any other product expansion opportunities that are similar to IKE PoleForeman given it's been a pretty significant success?

We sat down at DISTRIBUTECH, which is a big trade show for the industry. It's the biggest international show for the distribution side of electric utilities. We sat down with a bunch of the IKE PoleForeman customers, the standards directors of those groups. And firstly, we're keen to understand how things are going with -- for them on IKE PoleForeman. They're really delighted, and you can see it in terms of the adoption curve cycle. It's tracking way ahead of our expectations in terms of customer conversions. And I think because our team has done such a good job in terms of defining and building and delivering that product, there are other things they're looking to do better and do more efficiently. So touchwood, we really value these customer relationships, but I think we're in a very privileged position now to be able to listen to requirements, continue to work with the really large customer council that represents power delivery to more than 70 million or 80 million customers across North America and build them what they need. So that's the opportunity. It takes a while to get into that spot, but we're excited to keep working with that group.

Thanks, Glenn. Question, the company seems to be extremely undervalued versus some recent U.S. transactions that I'm aware of. Why the disconnect?

Yes. Look, in the private markets, I think there's more and more attention being applied to what's happening across distribution and electricity networks. It was a pretty unglamorous place to be 10 years ago. I think everyone's woken up to the fact that you've got to triple the capacity of the grid in the next 25 years, and that's a big tailwind. And so technology that helps you do that is hopefully in the right place at the right time in terms of market. So yes, who knows in terms of where valuation necessarily should be. We, of course, always think it should be higher. But we just have to keep kicking our goals operationally, delivering every quarter and continuing to create differentiation in terms of what our technology does and how we serve customers, our brand, our customer experience as well as the technology that underpins what we do. So yes, we feel, again, lucky to be in the right market at the right time.

Great. Thanks, Glenn. And you touched on it just then in terms of the grid, but the question is the grid hardening thematic in Australia is playing out rapidly with Janus plus Southern Cross Electrical and SKS enjoying strong share price appreciation. Is the grid in need of similar upgrade and spend in the U.S.?

It is. And it's so interesting seeing what's happening in Australia and now how -- what we do is resonating with the Australian capital markets and shareholders and investors. The problem in the U.S. is 100x larger and more urgent than what it is in Australia. So that's exactly the thematic. I mean when we're selling to these customers, these IKE PoleForeman customers, this is all around network hardening grid resiliency initiatives and grid capacity as they build more power delivery capabilities. So it's exactly the same problem, but it's significantly larger.

Perfect. Thanks, Glenn. And just a final question in terms of AI and automation. I know we talk about a fair bit in terms of being an overused word, but just the capability within IKE for new and existing products.

Yes, we've invested significantly. Brian touched on the level of investments we've made in, well, customer and market development, but also in product development. One of the big areas we've invested in has been AI and automation. We're looking at a slide here on the screen where we've built capability to look at like a whole of network scale. So think about being a utility, you've got 1 million assets in the field, being able to detect and identify your weakest points. These are the kind of specific workflows that we've worked on for the past 2 years or 3 years. And the exciting thing is they're coming to market now. I think it's probably even more exciting that we're starting to put some automation tools inside of the established software products in the same way that you see with Microsoft or Google or whoever, you add automation into an existing embedded footprint. And we think that can add a lot of value to customers and hopefully to ARPU per subscriber.

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

Great. No, thanks, Simon. Nothing else for me. I appreciate everyone taking the time to join. As always, Brian, myself and Simon are always available for follow-up questions or calls. So please get in touch with anything additional.

Great. Thanks, Glenn. Thanks, Brian, and thanks all for attending. Cheers.