I attended the FY23 result call this morning for $IKE. I've reported the gist of the results yesterday, so today I focus on the detailed insights from the brief call.

1) Research and Engineering Expense

The uptick in R&E expense in H2 over H1 is due to a $3m impairment of capitalised prior year R&E investment. It is a non-cash item and follows from the regular impairment tests. This means that some historical R&E spend is now not expected to generate the returns in the future that were envisaged originally. I'll take Glenn at his word that this is a "one-off", but will be alert to any further "one-offs" in future reports.

If I exclude this item, H2 R&E expense falls from $7.6m to $4.6m, compared with $3,8m in H1. And total FY R&E expense falls from $11.4m to $8.4m, an increase of 44% over FY22.

Total expenses without the one-off was $25.0m or 81% of revenue in FY23, vs. $19.5m or 121% of revenue in FY22.

Looking to FY24, Glenn said that FY23 R&E was "almost normalised in terms of absolute cost". This response to my question is ambiguous, as it is unclear whether he was referring to the expense including or excluding the impairment.

On expenses overall, Glenn made clear that he expects these to scale at a lower rate than revenue growth from hereon in.

So, with this item explained and excluded, $IKE FY net income was neatly within my forecast range.

To Glenn's credit, there is no massaging of numbers, no "adjusteds" or "underlyings". The results are reported on a statutory basis and everything is there in the Accounts. That's a Green Flag for me compared with so many of our CEOs.

2) Revenue Concentration

Given that the expected progress of two customers in rolling out their networks with in the catchment of a single utility in Kansas has caused $IKE to flag that Q1FY24 subscription revenue is likely to fall below Q4FY23 results, I asked how concentrated $IKE's customer base is.

In response, Glenn said that there is some concentration risk. He added that the top 10 customers account for 45% of total revenue. So, it is good to have this datapoint, and the concentration is not as bad as I feared, but still enough to drive volatility from period to period. Glenn added that this will reduce over time as the business scales.

On the Kansas rollout, Glenn said that IKE has good visibility into their customers' rollout plans, which include many States. He is confident that growth will resume once the programs move beyond the catchment of the current utility that is "old fashioned in their processing of data".

3) Next Gen Pole Foreman

Glenn reiterated that this is due for rollout in the second half of this year, which has been a consistent message for the last few presentations. (However, ambiguous as to CY or FY.)

4) M&A

Glenn reported that the IKE Structural product, developed via an acquisition in 2019, has achieved 5-10x revenue growth and they are very pleased with it. He reiterated that they are continuing to key an eye out for further "well-priced" opportunities over the next 12-24 months.

5) Geographic Expansion

Glenn reiterated that for now they remain laser-focused on North America, but that longer term, geographic expansion is on the agenda.

He reiterated that they are now the "poles data partner" for one of the global mapping companies that drive cars and fly planes in 90 countries to generate maps. He said they can't mention the firm, but think about the giants ("like Apple, Microsoft, Google"). While Glenn has now mentioned this a time time in recent reports it is not clear to me what this means from a business model perspective. I mention this because if there is a route to market through this partnership, then that could drive geographic expansion via customer pull.

Personally, I hope they continue to remain laser-focused on the USA. I want to see a business that can grow strongly, and start throwing off cash at attractive SaaS-like margins. International expansion before achieving this would be a thesis-breaker for me because it would put off indefinitely, the time it would take to see the real economics of the business.

Conclusion

For FY23 over FY22, $IKE's incremental revenue over incremental cost (direct + expenses) was 102% including non-cash costs, and 123% excluding the impairment item. So, operating leverage is starting to show through, and Glenn is clear that expenses can now be managed to grow slower than revenue. The question is, after a flat H2 compared to H1, does revenue growth take off again in FY24?

For now, I will hold my reduced position. $IKE has a product customers appear to want, and industry competition is favourable to them. But will all those impressive logos increase their use of the $IKE products to drive their productivity?

Disc. Held IRL and SM