$IKE provided their regular Q3 performance update today and I attended the call this afternoon with Glenn Milnes.
Their Highlights:
+ YTD revenue of ~$23.3m (+134% vs pcp) + Q3 FY23 revenue of ~$7.9m (+88% vs pcp)
+ Q3 FY23 recurring subscription and reoccurring transaction revenue of ~$7.2m (+121% vs pcp).
+ New contracts closed in Q3 FY23 of $7.3m
+ YTD gross margin approximately of ~$12.3m (+98% vs pcp), with a YTD gross margin percentage of approximately 53%.
+ Total cash and receivables as at 31 December 2022 of ~$23.5m, comprised of $20.6m cash and $3.0m receivables, with payables of $1.8m and no debt.
My Assessment:
KPI Report
I have taken their PCP YTD 9 months KPI report and added the previous PCP period, because it is important to understand how the business is evolving over a longer term, because the picture is very helpful.
Figure 1: Analysis of the YTD 3Q FY23 and YTD 3Q FY22 KPI Reports
From FY21 to FY22 we started to see the rapid growth in platform usage off a very small base, particularly by larger customers. Although usage growth in the latest period has moderated to (only!) +60%, the lagging revenues have started to come through strongly, with platform revenues up +258% in the latest report, compared with (only!) +135% in 9m FY21 to FY22.
A similar story can be seen with subscriptions. Even though subscriber growth is steady at +14% (vs +15% 9m FY21 to FY22), subscription revenue growth has accelerated from +14% to +60%, and Platform Subscription Gross Margin from +6% to +63% in the latest report.
Hardware sales are becoming less significant. But even here Gross Margin growth accelerated from +60% to +63%, with %GM indicating that cost increases are being passed on to customers.
Overall, the KPI report shows continued strong growth, with strong acceleration in transaction revenues a highlight.
% Gross Margin
As @shivrak k and I have discussed over the months, the overall trend in %GM is a question mark. Overall %GM at 53% appears to have stabilised from 1H (53%), after declining significantly from FY21 and FY22.
I took the chance on the call today to ask Glenn about this. Glenn responded by explaining that customers are increasingly requesting analytical services from IKE on their datasets, which is provided through the ikeINSIGHTS platform. Glenn explained that at the moment this is labour intensive and in high demand. Glenn said hat they are investing heavily in automating the required analysis, and over time he is confident that this process will become more efficient and the %GM will increase.
So, this is a good answer and something that we can now track over coming periods.
Cash Burn
I asked about the large $5.1 million cash burn from end of 1H. Cash is now $20.6m from $25.6m. Glenn confirmed that a “very significant” part of this was due to the appreciation of the NZD to the USD that occurred from end September until end December. (My calculation is that as much as 60-80% of the “burn” could be FX-related, but we’ll see in 3 months time.)
Pipeline and Progress in January
IKE currently have 5 of 10 of the top electricity utilities in the US as customers. They have numbers 1, 3 and 5, and the sales teams are working hard at numbers 2 and 4.
Glenn reported that they have “Sold well through January, and delivered well too, so feeling good for Q4”.
The Market Opportunity
There is a lot of material in the presentation about the US market opportunity. I won’t go through this as it is evident to everyone who is following the US macro-picture. What Glenn conveyed is the massive challenge Electric Utilities and Telcos are facing given the need to invest in the grid (after years of underinvestment), the energy transition, broadband rollout and 5G and their ageing workforces due to industry demographics.
He talked about how even the smallest municipal utilities have a relentless programme of investment for years to come. Its recession-proof, and most are regulated.
On the sales cycles he said that utilities are the slowest (longest cycle), telcos are faster (but “deliberate”), and the engineering firms are fastest (some “within a week”).
The overall market is at the early stages of penetration.
My Takeaways
IKE continues to grow strongly. Based on today’s progress, by my analysis I expect FY revenue of $31-34m, which would be >100% growth over the year, an acceleration from FY22 vs FY21 which was +71%.
Margins appear under control, so we should start to see ongoing evidence of operating leverage as expenses as % revenue continue to track down.
There has been quite a bit of FX noise muddying the cashflow story in the recent reports (up and down), so we have to wait for the FY results to see a clear CF story. However, it sounds like the underlying cash burn is modest. In any event, they need to invest now in the platform to maximise automation and deliver value-added features for customers which will result in increased pricing.
I am convinced by some of the questions on the investor call that the market is still not paying close attention to IKE. (Some of the questions on the call indicated they even those who are, lack understanding of the business.) I toyed with the idea of increasing my holding, but this is still a high risk proposition and at 3% of the RL portfolio, I am happy to hold for now.
$IKE remains my strongest conviction microcap, with results across the board this Q reinforcing this view.
Disc: Held in SM and RL
ikeGPS is a dual-listed kiwi company that provides ‘pole capture’ enterprise software to large US communications and utility companies. There are two distinct arms to the business, but in recent years the focus has shifted away from their ‘Spike’ hardware to the ‘IKE Analyze’ cloud solution in North America.
In simple terms, IKE Analyze is an end-to-end solution that provides hardware and software to help ‘capture’ utility pole information with increased speed and accuracy.
A field worker will take highly-detailed images of a utility pole with specialised IKE hardware. That data goes on to create an accurate ‘digital twin’ of the pole in IKE’s cloud software. This ‘twin’ can be assessed remotely by a software analyst for structural stability and additional hardware positioning.
The accuracy of the capture data means permit approval for hardware additions is more than halved when compared with traditional methods, and has been a key driver of its success in signing up major US telecommunication companies, since that speed is particularly useful – and cost-effective – in the competitive rollout of 5G.
There is a real chance IKE will dominate this niche, because in most instances there is simply no direct competitor. There are some disparate pieces of software and hardware that can be cobbled together to create a similar workflow, but IKE is the only true end-to-end solution that specialises here, and as such is much better suited for large scale projects.
Furthermore, about a year ago they made a very smart – and relatively inexpensive – software acquisition in ‘Pole Foreman’, which is the component that measures ‘pole loading’. In simple terms, this is the amount of strain that a pole will undergo in strong winds, tornadoes, hurricanes, etc. This piece of software was already deeply embedded within the industry when they bought it, and so came with a strong moat and a legion of customers, some of which have gone on to sign large contracts.
Finally, all that captured data is kept on file as part of an immense and comprehensive ‘pole record’. This data set comes with enormous potential to monetise longer term, as companies may come to rely on up-to-date data sets for larger projects, planning, and all sorts of possibilities.
In addition to hardware costs and yearly subscriptions fees, for every pole that’s analysed there is an additional fee. I suspect it’s in the region of $3-$4, depending on the customer and contract, but I haven't been able to confirm this to date.
This transition to a mix of high-margin per-pole and subscription revenue means IKE is looking on track to tip into profitability in the next couple years. With operating costs mostly fixed, it's showing early signs of decent operating leverage, and at a certain point any revenue should float straight to the bottom line. It's well capitalised after a recent raise, still has its founder on board as the CTO, has a tightly held register and is executing well. All in all, one of the more interesting 5G pick and shovel plays I've been able to find.
To give some idea of the addressable market, CEO Glenn Milnes recently estimated that the opportunity within the next 3-5 years from the top 15 utility providers in the US is perhaps around $225m.
IKE is not exactly cheap in traditional terms and is incredibly illiquid, but this is a business that has the potential to capture much of its US market unchallenged in the next 5 years. IKE will very possibly have a dominant moat for years to come servicing the longer term thesis of utility pole maintenance, and other ‘capture adjacencies’ such as infrastructure for roads & rail.
