My straw yesterday reported on the results call. From this I noted a flattening of performance in H2 compared with H1, and we also heard from CEO Glenn that platform transaction growth would likely be lower in Q1FY24 than Q4FY23. Because of this, I have taken a bit of a dive into the quarterly data for FY22 and FY23. I will also comment further on risks around the FY23 financials, expanding on my response to question from @Vandelay yesterday. As usual, I end with some important key takeaways.

Annual Performance

Let's start with annual numbers for FY21, FY22 and FY23: Figure 1 shows revenues, customers and transactions and Figure 2 shows Gross Margin.

Figure 1: Annual Revenue, #Customers and # Billable Transactions (000)

Figure 2: Annual Gross Margins

Overall, pretty impressive growth. Revenue CAGR is 82% and GM CAGR is 67%. So far, so good. Importantly, we can clearly see that the strategically unimportant Hardware and Services are becoming less significant, while the Transaction Revenue is becoming a major revenue driver while also making a major margin contribution.

There's been some discussion here about declining %GMs: 64% (FY21), 62% (FY22) and 53% (FY23), although within this I have noted that H1 FY23 was 53% and H2 FY23 was 54%, so it may have bottomed out - but one to keep an eye on.

Figures 1 and 2 also shows over the last two years, more customers are on contracts with a transaction component and/or customers are using the platform a lot more - frankly, over 2 years transaction revenue has exploded. If this continues with large enterprise customers, then perhaps we will see the strong net revenue retention shown by SaaS firms like $ALU and $WTC, where existing customers grow strongly for several years as the platform is adopted and integrated by more team (departments / geographies) into work flows. That's a core part of the thesis.

So far, all so good. But now let's look at the quarterly performance.

Quarterly Performance

Figures 3 and 4 show the same KPIs broken down on a quarterly basis. The picture is (obviously) the same in aggregate, but it raises an important question. (Note these pictures are less flattering because we don't have the full quarterly breakdown for FY21, as the information has only been reported consistently for the last two years. So only FY22 and FY23 are shown.)

Figure 3. Quarterly Revenue, #Customers and # Billable Transactions (000)

Figure 4: Quaterly Gross Margins

When looked at on a quarterly basis, it is clear that revenues and margins have been flat and/or in decline for the last three quarters.

More significantly, even though Glenn reported that Transaction Revenues in 1Q FY24 are expected to be lower than 4Q FY23, what he omitted to point out is that transaction volumes, revenues and margins have already been declining since 2Q FY23!

This wasn't immediately apparent from the report and presentation, because the quarterly data isn't presented in an easy-to-read format, You have to break it out across the reports.

If, as Glenn reports, transaction volumes are lower in 1Q FY24 than 4Q FY23, then that would represent 4 consecutive quarters of decline. This is at odds with aspects of the core thesis: that customers number are growing (true), that customer capex and therefore engineering work is growing (true - 5G, Broadband, Electricity distribution ... you can see it in the annual reports of the major US utilities), and that customers are increasingly using the platform to deliver work more efficiently and that over time, large customers are rolling it out (in question).

Now we know that growth is not linear, and that progress ebbs and flows, and that data can be lumpy from one quarter to the next.

We also know (from yesterday's call) that some customers will not be able to use the $IKE platform in all geographies, depending on the policy of the owner of the poles, and more specifically, that two major customers are currently working in areas where this is impacting utilisation.

But it raises a question-mark - and it is something to keep an eye in future reports.

FY23 Financials

I wanted to conclude with a further comment on FY23 financials, as I gave a "first pass" response to @Vandelay yesterday.

For this, consider the 1H FY23 P&L in Figure 5.

Figure 5: 1H FY23 $IKE P&L

Let's go through line by line and see if we can scope out a directional forecast for 2H FY23! Some items are impossible to forecast, but I'll comment on those that can be.

GM is slightly better at 54% although revenue is slightly down. So let's say GM is flat at $8.2m.

FX was +$2.2m in 1H. Having looked at NZD and USD rates and cash balances, I forecast this to be -$0.8m to -$1.2m for 2H.

On expenses, Ian said on the call that costs are being controlled well. However, he also indicated that $IKE are continuing to invest heavily in the product and the supporting systems. He spent quite a bit of time on the call detailing this, even adding a slide that was in the ASX release! In addition, all the staff in the Expense item are subject to wage pressures, so it we modestly assume a 5% step up in expenses in the half, that would add -$0.6m. I could be wrong on this, if more of the staff effort on development has been capitalised.

Bottom line, it is easy to see negative pressure of $3-4m on the P&L while we know that GM is flat, half on half.

Given that Net Income was $1.1m in 1H, that would point to the result for the FY leaning towards a $2-3m loss.

This could be swung either way by those line items that we cannot predict, so my window for the result is $0m to -$5m, which compares with a loss in FY22 of -$7.86m.

So, in answer to @Vandelay , no, I don't think $IKE will post a profit in FY23.

And neither does the market. The consensus (n=2) is for a -$3.54m loss, which agrees with my result.

In short, I don't think there'll be any positive surprises in a few weeks time.

My Key Takeaways

As I have said, $IKE is my highest conviction, small cap. Until today, I had been holding a "double allocation" compared with what I normally hold for high risk holdings.

The analysis I have laid out today and the insights from the call yesterday don't change my overall view of the investment thesis, and my view that I believe that, over the LONG TERM, $IKE will be a profitable and much more material business.

It is also the kind of business that is very likely to be acquired by the large corporates providing technology solutions to utilities (think Siemens, ABB, Mitsubishi etc.). The reputation it is building in the space and its blue chip client list makes this very likely, in my view.

However, the lesson I have learned over the last 3 years in holding high risk, unprofitable businesses, it that I have suffered outsized losses mainly due to failing to manage position size. By this I mean, I have at times confused getting to know a company with getting caught up in the story and not properly evaluating the risks and adjusting over time, ahead of the market telling me what I really already knew!

I believe the immediacy and quantum of the growth trajectory is today more of a risk, standing here in FY24 than it was in FY22 and even 1H FY23.

Adding to my assessment of risk, is that I feel that $IKE could more clearly communicate their results. The quarterly KPI data is all there, its really good, and I hope they stick to it. It's just that you have to do some unnecessary analysis yourself to extract the full picture.

In addition, by no longer reporting New Contract Sales or TCV, investors are losing some forward visibility. I said yesterday that I support this decision for reasons set out in yesterday's straw. However, $IKE also do not report churn or net revenue retention, so investors do not have visibility that other SaaS companies provide into the quality of their revenues.

In the same vein, the number of customers metric is almost meaningless. An engineering firm of 50 engineers counts that same as a $100bn cap utility with thousands of engineers. Yesterday's narrative on transaction revenues indicates that customer concentration may be more of an issue than is apparent.

As a result, I have halved my RL position in $IKE from 3.0% to 1.5%. (And will make a proportionate adjustment today in SM.)

I look forward to being able to increase position size when growth trajectory and profiability are confirmed. In this decision, I am prepared to give up some upside as the price of securing that option.

Disc: Held SM and RL