ikeGPS Group Limited (IKE) Earnings Call Transcript & Summary

Good morning or good afternoon, and welcome to ikeGPS First Quarter Financial Year 2027 Performance Update as released on the NZX and ASX this morning. From the company today, we have the CEO, Glenn Milnes; and CFO, Paul Cardosi. Before I hand it over to Glenn to go through the quarterly update on the screen. [Operator Instructions] Glenn, I'll hand over to you.

Great. Thank you, Simon, and thank you, everyone, for taking the time to join. We've had a lot of information in the market over the last 2 months or so in terms of the year-end and the audit and then the annual report, but pleased to update everyone on the first quarter. It's been a really strong quarter. It's ahead of our plan, ahead of our targets. And Paul will take you through the numbers, but we were about 31%, 32% up against prior calendar period in terms of exit run rates for our subscription revenue base gross margins kept improving. I think the thing that, as owners of the business and shareholders, you'll be most interested in is where we are in terms of coming to market with 3 new products. And I would like to take you through those because they will drive, we hope, if we execute well, materially more ARR growth based on a customer council and industry demand in terms of what we are building. And we are being a little bit coy at the moment because of competitive factors around exactly what we're shipping through the second half of this year. But we do have a new platform coming that takes us into the management of the electrical side of the grid, taking power from the distribution assets on the street into a home or a business. We've got a next-generation product coming that takes us into make-ready engineering. So that means electric utility can design and develop more capacity in terms of their grid infrastructure, and we've got a new communications module for the fiber industry. So all of these things are in flow and wanted to make sure everyone is up to speed on that. It's what we got funded to build and develop. And then there's a final thing around AI. We've now got our entire IKE-specific platform up and running. This is something everyone is reading about. We're all looking at the same media, et cetera. But we have an IKE-specific platform called Vitruvius, which is now driving a lot of not just how we do things, which is very IKE-specific. It's around the electrical grid, but it's also how we put AI inside of our products. But I'm going to hand over now to Paul and scroll down this document. So please bear with me. And Paul will take you through the numbers. So Paul, as you know, is our CFO. We're both based out here in Colorado. So Paul?

Thank you, Glenn. I'll start by clarifying. I know that many of you commented and have seen an amended release. I just want to call out that being very consistent with what we shared last quarter, our guidance for subscription revenue is a similar growth rate to what we saw last year, and that was an edit that we caught as we went to market. So I just want to clarify that you are seeing the amended release, the guidance is really the major change, again, a very high guidance and similar to what we saw in FY '26. If I look at the exit run rate, so this is our ARR run rate at the end of June 30, you can see a very strong continuation of the growth, $22 million at the end of June FY '26 -- sorry, 2026, that's our FY '27, comparing with $17 million in the period last year and $13 million the year before. That's a 31% growth rate. Granted, FX helped by 3 to 4 basis points. So still a very strong quarter for us, and that's a continuation of a very strong CAGR at 30%. So our exit run rate ARR growing compound annually at 30% and it was 31% for the annual comparable. Just moving to subscription revenue. We've talked a lot in the past about growth coming from new logos and upsells, cross-sells to existing customers. One thing we don't talk about too much is the churn. We see very low churn in our business, certainly in the last few months and even looking back last year. So we have a very sticky solution. Customers are buying it. We don't lose a lot of revenue. And you can see on our platform subscription revenue chart, it was a 27% growth year-over-year for the first quarter of FY '27. Just going down to the next slide, it's really the seat comparable, again, looking at our products and more from a seat perspective. We do predominantly sell on a per seat model for our subscriptions. We are looking at our new products and pricing models associated with that. But you can see 19% seat growth. So really, the 19% seat growth shows that many of the seats we're selling are at a much higher price. Clearly, our subscription revenue outpacing seat growth. So definitely getting more from our price increases as well as higher pricing from some of the customers that we're selling to. So again, continued strong seat growth through the first quarter of FY '27. If you jump, Glenn, now to the next slide, one thing to talk to is our transactions revenue. So this is our services business where we do services work for some of our customers. Most of it, but not all of it, is heavily predicated on our telecommunications broadband fiber. And we've commented on past earnings calls or performance updates about BEAD funding, government funding and a change in the U.S. administration. And the bottom line here is it has been slow in terms of projects in the market. Read this slide as macroeconomic, not execution by the business. We feel this is a low point for us. There is line of sight to projects. But again, that freeing up that broadband funding for rural fiber rollouts has taken longer than we anticipated, and that's reflected in these numbers that you see here. I don't know, Glenn, if you want to comment on that or you want me to just keep going? Sorry, you're on mute. Glenn, you're on mute.

Yes, we believe that the fiber market has not gone away, and we've got line of sight, I think, to the next 3, 4, 5 years of fiber projects. And so yes, there has been a bump in the road, and this is the services-based item. Remember, all of these customers use our software, then we're adding a value-added service over the top of it is the way to think about this business. And the next chart actually talks to that quite strongly if you look at how the pure subscription part of the business has grown in terms of ARR.

Yes. So continuing on, if you look at the stacked bar chart at the bottom of this page, IKE has intentionally gone to evolving to a heavily focused subscription-based model. And you can see that, kind of, in our dark blue in terms of the mix that the revenue is now coming from subscriptions. I think it's important to note, this is a very recurring predictable model for us. It's also driving a lot of the gross margin accretion that you hear us talk about, which gives us way more operating leverage to invest in some of those new products that Glenn mentioned at the beginning of the call as well as the AI initiatives that we've got within the company and in our products. So that subscription business model shift is reflected, I think, quite well visually on this slide. You can see how we've moved away from being a hardware one-time revenue business as well as less services revenue, granted some of it macroeconomic. But clearly, the mix of our business has shifted over these last 3 years, and we'll continue to see that kind of shift as we move forward, leading to higher gross margin. I'll wrap up with just kind of the metric slide, which kind of summarizes everything. So if we can, Glenn, just move down to the last page. So you can see revenue flat year-over-year looking at Q1 of '27 versus '26. As I mentioned, gross margin improved by 7%, heavily driven by our product mix, revenue mix. We continue to add significant amount of customers. We're up 8% using a trailing 12-month subscription customer count. And you can see the growth rates that I've talked about already, not just in our subscription revenue, but also our subscription margin. We continue to see improved gross margins in that business as we scale the product lines. Hardware and other performs well. I mean it's a small revenue stream, but you can see fairly decent gross margins on that side. And then really, the transaction revenue count is really, as I commented earlier, showing negative margin. We do have a cost structure that requires a certain level of services to support. Again, we are, I would say, cautiously optimistic for second half, but potentially see Q1 as a low point in that business as we look for more funding to free up and more projects to come our way. So more to come on that. I'll wrap up and say thanks, everyone, for calling in and hand it back to you, Glenn.

Thanks, Paul. So yes, look, the items I was just keen to highlight tie into the subscription revenue growth, which we expect to continue, where we also intend to continue to increase pricing through this year in terms of a growth driver. The more capability we build inside of our software, we intend to charge for. And then I think the really exciting thing is what we're doing with new products, which I mentioned, in particular, moving to a new platform that means that we're managing the electrical side of the distribution grid in terms of getting power to customers and all of the infrastructure that's involved. So think of transformers all the way through to smart meters in terms of power management. That's very close to being fully developed. We're working with a customer council of the biggest utilities in the United States who have asked us to build this for them. But this will be applicable to the entire industry. And if we get it right, I think it's something that could be large. And I know the question is, hey, what's the TAM? Which is total addressable market. We think more around SOM, which is serviceable obtainable market. And this is large. So the per customer pricing for this new product is much more significant than the products we have in the market right now. And I won't just yet talk about what we think those numbers look like, but we do think it's exciting. Last thing is it's a topic that everybody is looking at, and we're all reading the same stuff is around AI, whether it's a threat or whether it's a tailwind. And we do truly believe it's a tailwind for IKE. We've -- we're now putting AI inside of our products, and we're charging more for our software. We have a proprietary database of more than 20 million human-engineered power assets. And we don't think our customers are going to build our software to replace IKE. And we're obviously keeping our eye on the ball in terms of usage. So we're running dozens and dozens and dozens of agents. So agentic AI, that's where you ask the AI to do work on your behalf rather than a person. And we're watching how customers are using that technology. But we just see this as a massive opportunity. And within the next couple of months, we will actually set up a demonstration of our internal system. So you can see what we're doing in terms of our internal AI system, we call it Vitruvius, which is Vitruvius was a Roman architect, and that's what we're basing our system around. I think those are the key items that we wanted to cover in this outlook. Again, the takeaway is a very strong quarter. We were ahead of our plans and our targets. We're excited about the quarter ahead. And obviously, both Paul and myself are available any time to connect. But Simon, I might throw to you, if I can, and for any questions that have come in.

Thanks, Glenn. Thanks, Paul. I'll just get to a few of the questions that have already been submitted first. Sinclair Currie at MA Financial asks, can the team provide some quantification of how the sales pipeline for the new products is emerging? For example, have customers already committed to take the new solutions?

So what we've done and what we did actually with the IKE PoleForeman product is pull a customer council together. And these are not mid-level people. They are the standards directors inside of very large electric utilities, and they engage on product design. We do not ask them to contract to a product because that can cause more problems than it can create benefit. So the answer to that is no. We don't have forward contracts. But we do have total engagement from the decision-makers within these utilities, and it worked for us well the last time we followed the same process.

In terms of the revenue model for the new solutions, is it going to be per seat, per module, or something else? And how does management see revenue scaling in '27 and beyond?

Well, we expect to keep growing at similar growth rates or higher, potentially. And the utility market does still operate on a per seat basis. And we want to keep our eye on how that evolves, but you -- we do not want to be the first to move to a usage model. And again, it kind of comes back to this AI discussion. Everyone is looking at a usage token-based revenue model that may happen in the electric utility space. But right now, it's not something that they are using or considering.

In terms of the forward revenue growth guidance you've spoken about in the releases, how much of that is dependent on the rollout of new products?

I can answer that, Glenn, if you want me to take it.

Yes.

I think what's important, Simon, I've seen some of the questions is the timing on these releases, we can't take any revenue until they're launched. And we've said launch is second half. What I would say is we heavily look at our sales pipeline. And in that pipeline, we do see some visibility or we see a lot of visibility into opportunities to take the new products. But with the timing of the launch and the starting of the revenue recognition clock, the impact, at least this year is likely to be -- positive impact will be more in the fourth quarter. So I think what's important is between now and the fourth quarter, again, launches before that potentially, but we've got to get the deal signed, the products rolled out. And typically, you do pilots before you launch. So the takeaway for FY '27 is there is revenue growth assumed, but it's later in the year, just timing with the launch and finishing the sales process. And I think just to address another question online tied to this is, yes, we do need to launch these products for a continued fast growth path into FY '28. We've not given guidance for '28, but yes, we need to keep improving or expanding, I should say, our footprint within the utilities. And these new products, we feel very bullish about, which will impact positively our '28 growth. But again, just answering the question, we have pipeline visibility, revenue impact likely to be coming later in the year.

It's a question around the language around new products has changed quarter-on-quarter from beta launch to coming to market as well as 3 products from 2 modules. Are new products ahead of expectations on delivery?

No, they're on target. They're not ahead. I think the thing that is ahead is we've built a full AI-first system in terms of developing the products means we can do it more cost efficiently and faster ultimately than what we had anticipated maybe 12 months ago. The whole world is living in this environment. So yes, we're just -- we're on track in terms of getting to market time-wise.

And just last submitted question from Michael Ardrey with Bell. Are there any existing competing products for the electrical management platform or product?

Yes, there are. And that's why we're being somewhat coy around what it is we've built, but there is an existing solution that is we think has got some significant weaknesses and it's a product that's being developed by one of the very large industrial technology companies in the electric utility market. So we think we can be better on many fronts, not just the product, but on delivery and service and customer experience and support. And as I mentioned, we've got more than a dozen of the biggest utilities in the United States that are working with us on developing this next generation of this tool.

We've got Jules Cooper, Shaw and Partners.

Just a couple of just sort of follow-ups, I suppose, on what you've presented just now, Glenn. You talked about the revenue model being seat-based in the industry. I just wanted to sort of press in a little bit because you'd sort of talked about as you're bringing new AI features to your customers, you will look at price increases. I suppose I just wanted to sort of clarify how you -- if it's not usage and we've got some token costs maybe that's sort of being embedded in some of the functionality, how you're thinking about sort of recouping that with your seat-based model? That's the first one. And then second, just when we were talking about the timing of product releases, I think you sort of suggested that there'd be some contribution in the fourth quarter from these product releases and benefit to the business. But could I just ask, have you taken a conservative stance around that? Or does the guidance for this year heavily rely on a successful launch? It's really just kind of what you've baked in versus providing some conservatism?