ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good morning, and welcome to ikeGPS' Fourth Quarter Financial Year 2025 Performance Update. From the company today, we have the CEO, Glenn Milnes; and the company's CFO, Brian Musfeldt. Before I hand it over to Glenn to go through the presentation up on your screen, [Operator Instructions] But Glenn, I'll hand it over to you. Thank you.

Great. Thanks, Simon. Thank you, everyone, for joining this update. I appreciate your time. What we'd like to do is run you through the fourth quarter update. Before we start, please take note of this important notice in terms of the information that's disclosed. So what we'll do is run through the performance headlines. We'll talk about our outlook for FY '26. Our year starts in April each year. So when we talk about '26, it's the period through to March 2026. We won't spend a lot of time today talking about the broader addressable market and IKE products. We've got various update documents coming through early May and early June, which will be a refreshed look at some of these items. So the fourth quarter was -- it was another really strong period for the business. So we're really pleased in terms of how the year concluded. So you'll see in the charts Brian will take you through shortly, our subscription revenue exit run rate is up close to 50% through this year based on the sell-through of various subscription products. We do expect as we go into FY '26 to continue at similar very strong growth levels into next year. So that sets us up, I think, very well as we think about our targets for FY '26. In the quarter itself, pleasingly, we closed almost $12 million of new contracts in the quarter, and that included some long-term subscription deals with some of the biggest electric utilities in the United States. And we'll talk a bit further to who those customers are and the context of those deals to follow. And again, our balance sheet strengthened again through this quarter. So we had almost $2 million of cash and receivables growth through the fourth quarter. So we're in a healthy spot from a balance sheet standpoint. The other item, which everyone, I think, is aware of, is we did have an unsolicited nonbinding acquisition approach from a private equity group out of North America at about $1 a share or $170 million enterprise value level through the quarter, which based on a process, was discontinued from a company standpoint. So be happy to talk about that in the Q&A section. And Brian, perhaps if you can take the group through the financial charts.

Yes. Great. Yes. So please let me first note, we did post an amended press release and investor presentation after market opened today. It was really just to correct some misappropriate labels on the x-axis of the 3 revenue charts. So no other information was changed but to make sure you have that, and we apologize for the inconvenience. So to start with the exit run rate. The figures on this chart represent the contracted annualized platform subscription revenue at the end of each reporting period or what we call our exit run rate. We ended fiscal year '25 with an exit run rate of annualized platform subscription revenue of $17.6 million, an increase of over 48% versus the same period in the prior year and a 3-year CAGR of over 40%. The customer -- excuse me, the company continues to maintain dollar-based logo retention rates across all of our current platforms of approximately 95%. And the increase in our exit run rate, strong retention rates, combined with the continued growth of IKE Office and IKE Office PoleForeman pipelines, gives us confidence that subscription ARR will grow 35% and potentially higher in fiscal year '26 based on our current contract momentum. This chart represents our contracted platform subscription revenue generated in the period from our key software offerings, including our IKE Office suite of products and our IKE PoleForeman platform. Platform subscription revenue continues to drive our growth, growing 34% to $14.4 million in fiscal year '25 from $10.7 million in fiscal year '24. The growth in fiscal year '25 was driven by the successful sell-through of our newly launched IKE PoleForeman platform, along with continued growth from our IKE Office suite of products. The revenue growth rate of 34% was slightly lower than forecast due to timing of contract closes related to conversion of customers to our new IKE PoleForeman platform. This is evidenced by the growth in the exit run rate of our annualized platform subscription revenue increasing 48% as we noticed on the previous slides. Platform subscription revenue now represents over 50% of our total revenue, and our sales pipeline for new business is strong and growing. This slide summarizes the seat and device license revenue the company had under active 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 103% in the last year, and we now have approximately 8,500 active licenses. Seat licenses have 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 platform. To date, 127 existing and new customers, representing over 5,600 licenses, have adopted the new IKE PoleForeman product. Our platform transaction revenue came in at $7.7 million for fiscal year '25, representing a 3-year CAGR of 6% and an increase of about 3% from prior year. In addition, margins from the platform transaction revenue improved from approximately 24% in fiscal year '24 to 32% in fiscal year '25. This increase is due to software improvements and operational efficiencies made during late fiscal year '24 that allowed us to deliver these revenues more cost effectively. Based on the contracts in place and the strength in our pipeline, the company expects transaction volumes and associated revenue from platform transactions to build into fiscal year '26. But as consistently stated, timing and delivery of these transactions are customer dependent and therefore, are variable. Total revenue improved by about $4.1 million or 19% to $25.2 million in fiscal year '25 from $21.1 million in fiscal year '24 primarily driven by growth in our platform subscription revenues. Recurring revenue -- or recurring platform subscription revenue represented 50% of our total revenue in fiscal year '25, up from 51% in fiscal year '24. Recurring subscription and reoccurring transaction revenue, shown in the green and the blue segments in this chart, continue to dominate our revenue mix, representing over 87% of the revenue for fiscal year '25. The continued growth of our existing software offerings give the company an expectation to continue healthy growth into fiscal year '26, including 35% or potentially greater growth in subscription ARR for fiscal year '26. This table summarizes the key revenue segments, revenue drivers and gross margin metrics for the company. We have covered most of the key revenue metrics on this table on the previous slide and note that all of the metrics are tracking in line with our current plans. Regarding the gross margins, our blended gross margin profile continues to improve with gross margin dollar growth of 37% versus prior year and gross margin percentage improving to 69% in fiscal year '25 versus 60% in fiscal year '24. The increase in gross margin was driven by improvements across all segments as management continues to drive cost efficiencies in the business and a continued shift in the product mix toward higher-margin subscription revenue. We expect this trend to continue into fiscal year '26 and beyond. The company also added 72 new subscription customers during fiscal year '25. 15 of these were added in the fourth quarter. During the fourth quarter, the company completed its conversion process to the new IKE PoleForeman platform, discontinuing support of the legacy PoleForeman platform. As a result of this process, we have converted 68 key customers, representing approximately 90% of the ARR from the legacy platform. And on average, we increased the ARR from the converted customers by about 7x. In addition, we have added 59 new customers, bringing our total customer count to the new IKE PoleForeman platform to 127 customers, adding over 5,600 new seats and adding over $17 million in total contract value to the business. In turn, approximately 40 legacy PoleForeman customers, representing about $100,000 of ARR, did not convert to the new IKE PoleForeman platform upon the discontinuance in the fourth quarter. We have recorded these customers as lost in the attached table, which is reducing our customer count from 420 at the end of Q3 of '25 and keeping it flat year-over-year at 395. We do expect some of these customers will eventually adopt the new platform based on the project timing and budget cycles, but note that the average ARR loss from these customers was under $3,000 per customer. Total cash and receivables as of March 31 were $15.4 million, comprised of $10.3 million in cash, $6.1 million in receivables and $1 million in payables with no debt. Our cash balances remained consistent over the past 12 months during a period of substantial investment into building new products and continued customer expansion. And with that, our balance sheet remains strong. And with that, I will turn it back to you, Glenn.

Thanks, Brian. And look, I think just being respectful of everyone's time, we won't go into the broader slides around the market, our products and what we do. I think there are some really important things as we head into this next year. Brian touched on IKE PoleForeman. Since we acquired that asset, I think by the end of this year, we would have grown that revenue stream by about 20x in terms of recurring subscription revenue. That matters a lot because as we win these big electric utility customers, they own the network. So if you're a communications company or if you're an engineering company doing work on an electric utility grid, if IKE is the standard, then we get that long tail of adoption that starts to sit behind the IKE PoleForeman product. We have some really interesting opportunities to expand across our customer footprint, and we have, we think, some very meaningful opportunities to extend our customer footprint. I mean today, we have, in total, about 500 enterprise customers, but this is a universe of perhaps 6,000 targets. So our goal is to keep landing and expanding across this customer footprint. And as I mentioned, we'll be delivering some new market information through May and through June in terms of how we're planning our growth journey from here. But we feel very well positioned in the industry at the moment. I feel we're in the right place at the right time in terms of market trends. Again, the United States has to double the electric capacity of the grid over the next 20 years, and it's got to harden the network so it doesn't fail when there's storms or weather events, et cetera. So we're serving a really important industry at an important time. So we're going to stay very focused on that strategy. And I'll pause there, Simon, and happy to take questions.

Perfect. Thanks for that, Glenn. [Operator Instructions] But first up, we have a question from James Bisinella at Unified Capital Partners.

Congrats on the result as well, Glenn and Brian, and a strong finish to the year. Look, just a few from me. Firstly, I mean, just on the FY '26 guidance in terms of subscription ARR growth, it's pretty solid at 35% or greater. Just keen to understand the drivers to that number. And I guess is this coming through in the pipeline? Just some additional context there. And in terms of where the growth is coming from, is it a combination of IOU co-ops and municipalities? Just a bit more context will be fantastic.

Thanks, James. Look, it's -- that guidance is based on contracts that are in place and are being deployed, plus obviously some pipeline opportunities. We continue to grow our footprint. It is being driven mostly by electric utilities in terms of their grid hardening and grid capacity build. There's some growth that comes from the fiber build-out. And we can talk to actually the fiber market in some more detail because that's the item that has a bit more risk around it in terms of the industry. But mostly, if we look at our 5-year, 10-year forecast, we're growing because of electric utility expansion rather than the fiber component.

Okay. Fantastic. Just a couple more as well just on the point of operating leverage. So there's good growth in gross margin also coming through. So just keen to understand incremental cost required to scale the business as ARR comes through. Like should we be assuming that the majority of the cost build is now out of the way and a lot of that revenue growth is dropping through to the bottom line?

Yes. Broadly, that's the case. I think we've invested substantially into 2 things, not just product development, but we've invested in systems so that we can keep scaling without adding people as we become larger. And we've invested a lot in brand and customer experience, and that drives pricing power. So those 2 things help to enable scale and obviously get to becoming a very profitable business over time. And Brian, you might want to add to that. I mean I think we're still a small -- relatively small company in a very, very large industry. And the companies we serve are the biggest infrastructure businesses in the world. So you do have to keep scaling to support these groups, but we think we can do it very efficiently from here.

Yes. And just to add to that, I think you will see improvement in the margin, as we said, over the next years. The cost base around the subscription revenue is fairly typical of what you see of a subscription company just in hosting fees and some minimal support. So we expect to see margin improvement, and then we should be able to gain leverage. As Glenn said, we've overinvested against the curve in our sales and engineering teams over the last few years. So you won't see matching growth in that over the next year or 2.

And just lastly, kind of digging into the transactional business as well, should we expect gross margin improvement there also, just given the IKE staffing out of Mexico and the like?

Yes. Yes. So again, we talked about that. We've shifted a lot of the team to Mexico. That team continues to get more and more efficient. And so we'll continue to invest the resources there in that space. So yes, we expect the revenue in that -- or the margin in that space to also kind of incrementally improve as well.

I think it's important for our shareholders and investors to understand the revenue flywheel for IKE because this matters a lot. I mean we're a technology company. We ship software products on a subscription basis to our customers. But as the flywheel goes around, we offer value-added strategic services and technology-enabled services, which creates stickiness with our customers. So it's building one thing on top of another. Again, we think that matters in terms of differentiation and stickiness with these groups. I mean we -- every time we close a utility customer, we think about them as a multi-decade account opportunity. And the transaction piece of what we do is an important part of that, but it's sort of the last piece of the revenue flywheel.

I'll just allow Jules Cooper from Shaw and Partners. Sorry, Jules, if you could just unmute.

All right. Sorry for that. Everyone can hear me now?

Perfect.

Great. The ARR growth is a really strong year, I should say, just like opening. And I think about migrations of existing customers from what we've seen in other companies to take 60-odd customers, 90% of your legacy revenue and uplift that 7x in the space of a year, Glenn, is -- congratulations. Well done. That is definitely very impressive. The ARR exit rate, too, was very strong, particularly in the fourth quarter. And I just wondered, you've guided to sort of that ARR growth continuing at plus 35%. But just given that really strong exit rate, should we see the [ subs ] revenue in FY '26 being higher than 35%? Just wanted to sort of make sure people are clear between booked revenue and what you're sort of guiding to there.

Yes. Brian, do you want to take that first?

Yes. So we're guiding right now at a 35% exit run rate growth, Jules, as that exit run rate kind of compounded up over the year. So right now, we're guiding to 35% on exit run rate. We'll probably give a little more guidance with the May release on the actual revenue number and what that guidance will be. Probably not quite as strong on an overall percentage, but in that range.

Yes. Okay. All right. And look, PoleForeman, like I said, has been very successful. Can you give us any perspective just within the sort of 8,500 seats how many of those would be PoleForeman is at the end of Q4 and maybe the ARR that underpins those seats, if that's possible?

Yes. We do disclose that. We did say we -- about 5,600 of those seats are for PoleForeman. We don't break out the ARR by segment at this point. It's probably not equal as far as seats to ARR. PoleForeman, because of the conversion process this year, some of the larger IOUs get a little higher discounts just because of volumes and terms they're committing to. So PoleForeman, as a dollar amount, will be probably closer to 40% of our ARR by the end of next year.

Okay. Fantastic. And I guess you've guided to 35% exit rate ARR for FY '26. Just as a broad sort of brush statement, are you able to sort of give us a sense for what you're expecting from existing versus new customers that sort of underpins that target in the year ahead?

We've -- we can -- obviously, we've got that set out in our plans and targets and sales quotas, et cetera, but we haven't published it. But there's still -- on the upside, there's a go-get number, which gets us into a better place. And again, just for context, for everyone on the call, we talked about being the standard in 8 of the 10 largest investor-owned utilities in the U.S. There's 106 investor-owned utilities delivering distribution power across the U.S. There's 3,000 electric utilities across the whole market. We haven't even scratched the surface in terms of market development. And I think that's a really important thing. We've purposefully targeted the very biggest utilities to begin with as we've come to market here in the United States, but there's a really large rest of the market to go and get. There's a very long tail of electric utilities that might not sound so big in a U.S. context, but they're still big companies and big accounts for us to chase. So that's how we're thinking about our sequencing of go-to-market focus.

Got it. So it does sound like you're quite confident that the new customer growth of the business is going to maintain at very strong levels by the sounds of what you've just said there, Glenn.

Yes. And look, it's one of these fascinating industries. A, keeping the power on, that really matters. It's critical to an economy or a country. The second thing is these folks are -- they're all natural monopolies. They're not competing with one another. So they share best practice, and it's unique for the electric -- the electric utility market is unique in that sense. So if you win the thought leaders and the biggest and best customers, they tend to share their practices with other folks. And you sort of have that ecosystem effect that can potentially flow from here. And again, we're trying to build not just the best technology, but also a really great brand and customer experience for this industry. And hopefully, that has that ecosystem effect in the medium term and long term.

Just some submitted questions that I'll get to now. Did the balance sheet still strengthen if you exclude receivables growth?

Yes. Receivables actually were almost flat as well. Receivables were slightly -- I think the receivables are up just under $1 million. So cash has continued to grow with receivables.

Perfect. Thanks, Brian. When will the company achieve its first half, half year statutory profit? And once it does, will it try to grow profit every year or just keep it flat around breakeven while trying to maximize revenue growth?

I mean that's a great question in terms of what capital markets are looking for. We're trying to build value for shareholders. So I think we've got to keep watching what's required in the market to maximize shareholder value. But obviously, we're still a small business in a massive industry. And we're looking at things with a multi-decade view. We want to be the standard for distribution design for the North American electric utility market. And I think that requires that we keep investing and being substantial enough to serve these really, really large infrastructure companies. So we'll keep balancing things in the short term and medium term.

Great. Thanks, Glenn. And can you comment on overheads and bottom line result?

Yes. We'll cover that in our May meeting when we do our full financial release.

Perfect. Thanks, Brian. And just last question. What sort of feedback are you getting from customers with respect to impacts on tariffs and other White House policy communication? Is this creating any CapEx or investment uncertainty from customers?

Yes. It's sort of chaos at the moment, obviously, in terms of policy and the tariff situation. We're very fortunate we're a U.S. software company delivering U.S. software to U.S. customers. So we're largely unaffected in terms of how you think about pricing and margin erosion. I think the uncertainty at the moment sits -- it's not with the electric utilities. They're on 5-year, 10-year, 20-year CapEx network programs. The uncertainty sits with perhaps folks that are deploying fiber networks. A lot of these groups source their fiber infrastructure -- so this is their cost of capital, right, their infrastructure from Corning and a couple of other U.S. groups that manufacture within the United States. But anyone that's sourcing fiber infrastructure from outside of the U.S. are obviously blindsided at the moment. So we're seeing a few groups that are frozen, but we're truly fortunate, most generally, in terms of tariff implications.

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

No, thanks, Simon. Thanks all for taking the time to join. We'll have various other releases coming through May and through June. So I look forward to staying in touch.

Awesome. Thanks all for joining. Thanks, guys.