ikeGPS Group Limited (IKE) Earnings Call Transcript

Good morning and good afternoon, and welcome to ikeGPS Second Quarter First Half of Financial Year 2027 Performance Update. From the company today, we have the Managing Director and CEO, Glenn Milnes; and the company's CFO, Paul Cardosi. Before I hand over to Glenn to go through the presentation up on your screen [Operator Instructions]. With that, Glenn, I'll hand over to you. Thanks.

Thank you, Simon, and thank you, everyone, for taking the time to join in terms of our first half performance update. I'd like to leave as much time as we can for Q&A towards the end of this session. The first half of the year, you've all likely seen the release. We pretty much closed the first half on track in terms of budget and growth targets. Yes, I would like to talk about -- Paul is going to take you through the numbers next in terms of the charts. I think the exciting thing for us in terms of ongoing growth, we've sort of followed a pretty consistent growth trajectory, expect to continue to do so. We've got 3 new products coming to market. We're grateful for the support we've had from shareholders in terms of funding some of these new capabilities. We are taking a very AI-first approach in terms of what we're doing and how we're operating as a business. We have invested some of the capital that we received last year. We raised $25 million last year to invest in new products, not to buy companies, but to build them. They're all on track. So we're bringing to market next year -- sorry, in the second half, not next year, a secondary design product. So that takes us into the software side of managing power delivery in the distribution network. And that matters because like a mid-sized electric utility might spend $100 million a year managing secondary power delivery. And we think we can make that more efficient. We've built that product with a customer council that includes many of the biggest utilities in North America. And we've got some other AI-generated capability around make-ready engineering, et cetera. So in November, when we release our full financial results, there will be demonstrations from the team around what these products are, and they're very real now. So we're excited about what these are going to deliver for our customers and also what they will deliver for shareholders and IKE in terms of subscription revenue. Otherwise, yes, we've tracked almost completely to plan. We're a bit ahead in terms of cash. We're on track in terms of revenue. But happy to take any questions on those further items in due course. And Paul, maybe you can take everyone through the numbers. The thing that we've had weakness around has been Professional Services. We've called that transaction revenue. That's the part that has had some headwinds. It's actually picking right back up. But Paul, you can take the group through that.

Do you want to hit the guidance first, Glenn? Or do you want to come back to that?

We'll come back to it. I think where we think we're landing is greater than 30% exit run rate in terms of guidance for the year. So it's really strong in terms of numbers and demand. The market -- we're in a pretty resilient market in terms of the United States electric grid demand for what we're doing. So we don't see things slowing down.

Okay. I'm going to walk through the charts that were published earlier today, just the key financial metrics that we typically cover. I'll start with the annualized exit run rate. So this is our September recurring revenue that's annualized and then comparable is with September of FY '26, which was 2025 calendar year and then September 2024. If you look at the growth rate, we were at 13% comparing our calendar year September 2026 annualized ARR versus prior period. And again, just if you look at our kind of growth over these 3 years, a very healthy 29% compound annual growth rate. So just to give you a perspective on how we exited ARR. And as Glenn just mentioned, we are projecting exiting FY '27 closer to a 30% growth rate, not a 13%. So -- and we'll get into how the new products and the new contracts, et cetera, will impact that positively in the second half as we hit Q&A. If I go to the next slide, which is just the recognized subscription revenue. I think most of you know, we've evolved the business to being a very heavily subscription revenue business, and we do have services and some hardware and training. But you can see a 22% year-to-date growth rate. So you can see just shy of about NZD 11 million recognized subscription revenue. And this is our core product offerings across IKE PoleForeman, IKE Office Pro and our Device-as-a-Service offering. So the core offerings within the IKE portfolio, we saw a 22% growth rate year-to-date. And again, if you look at the steady growth we've had as we've evolved into a subscription business, a 28% 3-year compound annual growth rate. So very healthy continued growth across the subscription base. Moving next, our pricing model, our licensing model is heavily a seat-based model. We sell typically 1- and 3-year contracts to large accounts, utilities, engineering firms, communications companies. And it's a user seat model over a 1- or a 3-year contract. And if you look at the seat growth, you can see that the number of active seats we had crossed the 10,000 threshold, which is I believe the first time we crossed that IKE's history. And it basically added up to an 11% growth rate over the prior year seat count. And then if you look at how seats have grown in the business, tied to both customer acquisition as well as new product launches, et cetera, in the last couple of years, we could see a 31% compound annual growth rate on the seat count. So continued strong seat sales as we sign more of those contracts. I'm going to jump to this slide, I just want to call out, we have, in the past, called this Platform Transactions. I think it's important to note that it's essentially tantamount to Professional Services. This is where a lot of our customers need additional help to either to collect and -- either to collect data about the full infrastructure or analyze that data, and we provide a services offering to those customers. We have seen demand reduced significantly this year. Some of it is tied to, I would call, delayed investments in U.S. telco infrastructure. The things that I would point out that I think are of note here is September, the month was extremely strong. So we did see a pickup in business and services work in the month of September. And we do go into October with a very strong backlog, a stronger backlog than what we've seen entering our first quarter or second quarter. So anticipate a stronger third quarter as we report in a few months, our third quarter around this business. I would say we remain cautiously optimistic around is the pickup a trend or is it a onetime impact? I would say we remain cautiously optimistic for fourth quarter. But again I expect, based on the visibility we have with our backlog, an improved performance in our third quarter in this area of the business. The next slide just shows you that evolution, right? The dark blue bar at the bottom just is really the subscription piece of our revenue. You can see that our revenue at $12.7 million at the very top was flat or relatively flat, down 1% over prior year year-to-date. But you can see the mix in terms of how subscriptions has evolved in the business. If you're doing the math or looking at the notes, 85% of the business is recurring revenue, and it's recurring revenue at 95% gross margin. So what that does is it gives us a lot of operating leverage to invest in products because over the life of the -- over the last few years of the business, you've seen an evolution and an increase in the business' gross margins, which just provides so much additional leverage for us to invest in the future technology and go-to-market that we have in the business. I'll finish with just really the metrics that really summarize everything here. I think a couple of things I'll just quickly call out that I've maybe not covered. At top section, you can see year-over-year 6% improvement in gross margin. So we went from 75% to 81%. Clearly, the mix of subscription as well as looking at the cost structure and our services business last year has really helped with both those efforts to improve the margin. I would call out, if you kind of scan down to Professional Services, negative margin, which is never good in the business. But again, September, the month was very positive. I anticipate stronger gross margin, positive gross margins as we get into third quarter and then beyond into fourth quarter, we remain cautiously optimistic about that. Hardware & Other, which is a very onetime revenue stream for us. It's dropped to 7% of our business. It was, I believe, around 10% a year ago. So that's a good thing, again, just really supports the narrative that we have around the recurring nature of the business that we have here at IKE. And I think with that, Glenn, we can move to Q&A or anything you want to add.

With Q&A. Thanks, Paul. Just in terms of first question, Glenn and Paul, platform subs revenue has been pretty flat for the last 4 quarters, around $5 million to $5.5 million. Can you talk about growth prospects of the company, excluding the new products, i.e., has PoleForeman topped out in terms of penetration?

No, it's not. And probably some important context with IKE PoleForeman. We acquired that asset that had $0.5 million of revenue when we bought it, and we paid about $3 million to buy that business. It's now tracking at about $13 million of ARR. So we've grown like 25x in terms of its growth, and we're still winning new customers. So that certainly has not stopped, Simon, in terms of the growth. And then what are we doing next? The new product stuff actually is relevant. We're living in an AI world now where you can develop products faster, but the thing you can't develop faster is customer experience and distribution and customer support and all those types of things. We're delivering a companion product to IKE PoleForeman into our customer base. And that's what we'll be presenting in November. But we're excited about that. It takes us into the management of -- the electrical management of the grid. And it's potentially a much higher value product than IKE PoleForeman if we get it right. So yes, we're pretty excited about the growth potential of, A, existing products; and B, the new ones. And keep in mind also, our competitors like SPIDA, SPIDACalc, we've hired all their key people into IKE to help us in terms of design. So when you see -- and again, I know it's all technical gobbledygook for many people, but we're launching a communications module inside of IKE PoleForeman. That's very much tied to taking customers from SPIDA, for example. We've got 2 key competitors. So anyway, we're pretty energized about the second half of the year. We've got 3 new products coming to market at the moment. Our team are very busy, but we think it's really going to matter in terms of revenue and shareholder outcomes.

We got a question from Richard Harrisberg, Canaccord...

Just a quick one on the ARR, which was pretty flat from Q1, and you referenced in some of the communication a bit of a delay on customer timing with some contracts. And obviously, the outlook still looks pretty positive that you're expecting over 30% growth. Could you just unpack reasons for the delays there? Was that something on the customer side and what you're seeing broadly from a budget perspective within customers' budgets and how much they're willing to continue to deploy technology like yours?

Thanks, Richard. I'll let -- Paul will follow with some more detail. There are no -- the whole utility infrastructure in the United States continues to invest in making the grid better, and stronger, and wider, obviously, in terms of capacity. So yes, we don't see any limitations there. But yes, some of these customers, they take much longer than you and I would like. But we're not losing any opportunities. It's just timing in terms of how they deploy budget and capital and things. They move very deliberately. They're pretty brilliant people, but they move slowly. And Paul, you might want to comment.

Yes. I think just to add a couple of comments. One is our poll forming growth, Richard, and also for the person that asked the last question, the growth is still a very high double-digit growth, and we still continue to see existing customers buying licenses and also new customers coming on to that product. I would call out that a lot of these large utilities look to see how their financial years are progressing. And often, they have dollars to spend towards the end of the year. And their years are typically January through December, not ours, which is year-end March. So if you looked at our sales pipeline going into this year and look at it now, those deals are still in play, I think, is the important point. It's not like suddenly all these deals dropped out of the pipeline. It's just the timing of them is a combination of waiting for their budget dollars to free up, but also there's a little element in a couple of deals where they're waiting for the new products. And again, we always planned that those would ship in the second half. And then the last thing I would say is I think I've mentioned this on prior calls, a lot of our PoleForeman renewals happen in the second half. So we will see the benefit of that price increase we talked about in prior calls, but that kicks in at renewal. And again, as we get through some of the renewal deals, you'll see the impact of that price increase. And that was always part of our plan. And as Glenn mentioned, we were within about 1 point of our recurring revenue plan for the first half. And it's more just timing these deals in the second half that's really got us kind of thinking about adjusting the outlook.

That's really helpful. Yes, maybe you could just unpack that a little bit more on the pricing aspect that you're expecting to see in the second half? And then on top of that, just the go-to-market strategy for the new products, which you'll be releasing that seem really exciting. Is that kind of going to be directly to existing customers? Will they have to sign up kind of separately to that and how that also impacts your sort of ARPU metrics?

Well, there's quite a few elements to that question. We're increasing pricing across the IKE PoleForeman product by 10% to 25% and trying to obviously optimize the way that, that fits together. The new products, we're testing price optimization across some of the handful of customer council groups that we have engaged. And we're lucky, right? We've got the biggest utilities in the whole country asking us to build something for them. They have relative price and sensitivity, but they also have procurement departments and those types of groups. So we're working our way through that. But the secondary voltage analysis product that helps power supply and power efficiency, we believe delivers a great deal of value into these groups, and therefore, we can price accordingly. So we haven't landed on pricing there. We will get the first 2 or 3 big utilities on the platform, giving us feedback, and then we'll be pricing it for the whole market. But potentially, it's a really exciting accelerator in terms of ARPU and the subscription base. But yes, still work to do, and we're certainly not going to put anything out there just yet, but we've got some thinking around it.

Yes, that sounds really exciting. Maybe just a last one for me. You guys, obviously, did really well earlier on in the year and achieving the EBITDA breakeven at the end of your FY '26 and that guidance. Obviously, you've then subsequently just invested in some of these products and the future growth that's going to come. What can we expect from a breakeven standpoint going forward? Is that an FY '28 aspiration? Or maybe just unpack that as my last question.