Good afternoon, and welcome to ikeGPS's investor webinar to discuss the company's performance update for the quarter ending 31 December , 2022. On today's webinar, we have CEO Glenn Milnes, who will go through the presentation released today on the ASX and the NZX. To ask a question, please submit them via the Q&A button at the bottom of the screen. We'll do our best to get through as many of them as possible. I'll now hand it over to Glenn.
Thanks, Ben, and thanks everyone for taking the time to hear the update. At the highest level, Q3 was another really solid period for our business. We just continue to grow in terms of capability and obviously revenue's growing really strongly. Feel very well-positioned as we go into Q4 of this year. What I'd like to do is pulse through these slides quickly. I know a lot of you are familiar with IKE and the story, and then leave enough time for Q&A at the end. From a revenue perspective, we're at NZD 23.3 million in the nine months to December, 134% up on last year. Remember last year was a big growth year as well.
Good momentum, and I think the key thing for investors is to look at the green and the blue part of this chart, which is subscription and transaction revenue, which is recurring and reoccurring revenue from our customers. It's much higher quality, it's much more predictable, continues to grow strongly. It's because we've built more software capability and the platform's sticky for our core customers. Most of this growth is coming from existing customers, so logos that we won two years ago or three years ago, and they're groups that keep growing and growing, which is a positive thing. The orange bar in this chart represents closed contracts, and the blue bar represents revenue.
We have some seasonality in our business because of storms, winter storms, and actually this year with flooding in California can slow down engineering activity. Overall, the trend here is strong. I think we're very well-positioned in terms of Q4 outlook and now starting to cover some of FY 2024 in terms of momentum. Similarly, this chart shows transaction revenue. That's the green bar. In the nine months to date, just over NZD 14 million of revenue from transaction sources. Remember our customers, when we sign up a customer, they pay us a base subscription fee, and then as they use the platform, they pay us a transaction charge or a transaction fee that sits over the top of that.
It's the way the whole industry operates here in the United States, so we have to be conversant with that. Transaction revenue is a really important driver of growth, and you can see, you know, hundreds of thousands of engineering transactions, happening, on the IKE platform and driving a lot of that revenue growth that we looked at previously. This table was in the release, that folk are able to look at, but just solid growth across, you know, the core things that we, that we focus on as a business. If you, if you come down to the platform subscription segment, number of enterprise customers, keeps growing, but we still have, you know, around 5% market share in terms of number of customers.
A really big opportunity in front of us, not just to keep building inside the businesses that we serve today, but also to add more logos over time. This is where I'll really accelerate in terms of the presentation, but be happy to cover questions and comments here on this call or afterwards. The market opportunity is just getting larger and it's good luck as much as good management. Even climate change perversely is a big tailwind for the IKE business. We just help these groups strengthen their networks and build their networks faster. All this storm event activity has just increased demand on the electric utility side and the fiber market and 5G small cell deployment side of things is just intensifying.
It's certainly not slowing down. We don't expect it to do so. Again, we just help these customers be much more productive in terms of the process to assess and build the network. You can see it in some of these charts. This is CapEx spend for the electric utility markets, hundreds of billions of dollars going into designing and building distribution networks. Similarly, the broadband market, the fiber market is just growing in terms of the level of investment. Most of these networks are going overhead onto power poles. Again, that's what we help design and help build faster from a fiber market perspective. Good, great macro market tailwinds.
There's just some more detail here around all of the drivers for electric utilities around aging infrastructure, fiber attachments. They've got to power the electric vehicle market. An enormous shift of energy going into the, into the distribution network, away from historical energy sources for vehicles. We mentioned the communications macro drivers. Again, this is a five-year-plus macro market tailwind. A lot of the infrastructure going into overhead networks. We help speed up the process for these groups to get to market faster and, you know, sign up their underlying customers and subscribers. We are continuing to add new and important customers. There's some really interesting new electric utility customers that we believe will close through this quarter and the next quarter.
It matters a lot because these are groups that we signed up some years ago that are now starting to really get to scale. You know, tracking that number of customer logos is an important leading indicator for us. Take a long-term view. We've got multiple growth avenues. One is around adding new customers, as we just talked about. A lot of our growth at the moment is coming from upselling and cross-selling into existing customers. Again, we know, our goal is to create decades-long relationships with the groups that we serve. We've executed two M&A transactions in terms of inorganic growth and continue to look for, you know, well-priced, high-value opportunities for acquisitions.
Although it's not in our near-term plan, the international market opportunity is very significant as well. For the time being, we're very focused here on North America, given that we're still a relatively small company ourselves. We've got a great team. They're all experts around poles and pole infrastructure and electric utility infrastructure. Some really brilliant young people that are gonna go a long way in this industry. We're lucky to have the team that we do. We have very low churn in terms of employees. Fortunate to have a great group. A bunch of people that are just growing up through the business and moving from junior roles to now very senior customer-facing roles.
In ditto with the leadership team, you know, always trying to optimize our leadership group. Again, a lot of expertise in the North American electric utility market and a lot of expertise in technology. This is a really niche area that we focus on, but the folk we have on the team really understand this industry and its challenges. It flows right up to the board. Again, we're fortunate to have a very strong board of directors with in-market expertise and also expertise in growth, public and technology businesses. I'll go even faster now through our products, but this is obviously where the rubber meets the road. We've got four products essentially. Our business model, every customer pays a baseline recurring subscription to access any of our products.
They pay additive fees based on usage. We offer optional value-added products such as IKE Analyze, which is where a customer, they collect the data using our technology. They send it back to us into the cloud. We use a lot of technology to process it, and then we send them back a an engineering product. That's the IKE Analyze business model. We've got these three layers of revenue generation. Some imagery here of IKE Office Pro. The photograph down on the lower left of the screen is a pole in our IKE Office software. A fielder's only had to take a single photograph in the field, and someone in the back office can do all of that analysis and interpretation. The photograph just above it are some of our dashboards.
We can show, in this case, AT&T, how all of their network projects are performing right down to the productivity of every single engineer that's working on a product. It's around, you know, a big value proposition is around digitizing assets. It's surprising how few utilities have digitized records of the assets they own, the infrastructure they own. Ultimately, this is around automation and integration, aging workforce, just enormous work demands. We help sort of bring part of this process into a very modern context and a very modern CX or customer experience and push things through to items like pole loading analysis, which is a really time-consuming process today for many customers. Second product is PoleForeman. It's part of the IKE Structural product set.
If you look at the left, it's taking IKE Office digitized data, and it's turning it into a CAD model so that you can design attachments and design your network. Understand if you're meeting compliance and meeting your own engineering standards and NESC safety codes. This is the flow-on product. It's used by five of the top 10 electric utilities in North America. Some examples there of its capability. Also an example of the customer council that we have helping us work on the next generation product, which we're excited about. That'll be released soon in 2023, and we think that's gonna potentially have a disruptive effect on the pole loading market. Lastly is IKE Insight. This is applying.
It's applying artificial intelligence and machine learning to analyzing these structures. Again, an engineer at a utility might cost NZD 100 an hour to be doing work in the back office, and there's opportunities to be automating these items, and that's what we're working on with IKE Insight. This is a complicated slide, we can take data from any source and process it and get insights and decision-making data from any data source relative to a pole asset. Some examples here of how it works in terms of putting the machine over top of this raw data to deliver some outcomes. I'll accelerate through Analyze, which we have talked about, I'll pause there then for questions.
Thanks, Glenn. Just a reminder, if you'd like to ask a question, please do so via the Q&A button at the bottom of the screen. Have a fair few come through. The first one, well done on the improvements in closed contracts. Can you talk us through the lead times you're getting from customers? You've mentioned fourth quarter 2023 could also be strong.
Yes. The lead times continue to shorten, and we're working so closely now with groups that it's almost a rolling, it's almost a rolling contract basis. Whereas historically some of these communications groups were saying. You know, they were coming at us and saying, "Hey, we've got nine months or 12 months of work ahead of us." They were placing a larger contract. Now we're working very closely with groups, and so the recurring revenue piece of things is flowing month to month. That's a positive. It's a positive item. We're finding that the engineering companies, you know, we sell to three distinct groups. The utilities themselves, they're quite slow to make decisions. The communications groups can be faster, but they still are very deliberate, you know, likes of Crown Castle or AT&T.
The engineering groups now are going pretty fast. You know, if they're allocated contracts, they will order. The lead, you know, the sales cycle can be very short, less than a week from engagement. That's really the way it splits up.
Thanks, Glenn. Next question. Gross margin of 53% for the nine months is steady with what you reported at the first half. However, a bit lower than previous years. How do you see the gross margin moving forward?
The item to keep in mind on the gross margin percent is the transaction revenue for us has just exploded in terms of growth. You know, it's up 250%. The nature of some of that business is a customer will collect the data, they'll send it back to ikeGPS, and we'll process it through our software, and then we'll send them back an engineering deliverable or an engineering outcome, so they can get on with building their network. Some of that process requires people, and all of those people costs go into the gross margin line. We're working through the Insight product on automating a lot of that work. At the moment, I mean, it's highly profitable, high-growth business, but it does impact that overall gross margin profile.
That's the item that we're investing in in terms of automation, so that we take people out of the equation and replace them with software.
Thanks, Glenn. Next question. In subscription sales, there was a material uplift in sales per client. Did you raise prices? It's worth just noting that there was a large uplift in sales, but clients remained relatively flat.
In Q3, we didn't raise. We've consistently raised prices over the last three years. Every time we release new capability, we raise price. Not in Q3. This has been Q2 and Q3 has just been usage, so more customers putting more subscribers on.
Thanks, Glenn. How much of the NZD 5.1 million cash burn in the quarter is due to the weakening US dollar to the Kiwi from October to December?
It's very significant. Again, the context here is ikeGPS holds cash in US dollars, which is our operating, you know, it's where we operate. Australian dollars, which is where we raise capital or have raised capital historically. The FX rate, we have to convert it to New Zealand dollars for reporting purposes each period. It does have a very significant effect in the currency. The New Zealand dollar strengthened significantly through Q3. I'm not sure exactly what the number was, but it's the majority of that difference is FX.
Thanks, Glenn. Can we please get more insights on the pipeline for new logo wins? Like, 'cause five of the largest utilities in North America, can it win any of the other five?
Yeah. I mean, we run three different sales groups and three sales campaigns, and one of them is the utility sales campaign, and it's reasonably straightforward. You know, There's 3,000 electric utilities. You can see who's the biggest and who's spending the most on distribution and work your way down, and that's entirely what that group is focused on, is winning. You know, we've got number one and number three and number five, so we're, you know, we're focusing on number two and number four, you know, and down that list. It's, you know, it's a It requires some patience.
you know, we've seen with groups like Exelon and Southern Company that if you do get through the door and Duke, then it can really open up over time. That's a key focus for our sales and marketing organization.
Thank you. Can you help us understand the upside from IKE Structural? Is there any ability to raise prices for this product?
Yeah. It's a great question, and the answer is absolutely. We, as we've signaled here in this document, we're releasing a next generation IKE Structural product, and alongside that, we've increased pricing very dramatically and put it into a pure subscription model. You know, so far so good actually. We've, you know, we've got all of our major customers on board and signing up. It's a, you know, again, it's taken some time to. We acquired that business two and a half, three years ago.
We've cross-sold IKE Office into most of that customer base very successfully. Now we're launching the next generation product as a SaaS offering with some new features and we're, you know, we should be able to have a very material uptick in terms of Structural revenue.
Thank you. How's the first month of 2023 gone so far? Is it still slow with the storms? There's a follow-up question. I'll ask in a minute.
No, it hasn't been as impacted with weather. Customers are kind of back. Although the United States, it's not like Australia and New Zealand with the whole Christmas holiday period. People still do take time out, I think, and, you know, decompress over the end of December and maybe the first week of January. No, the activity level is really high. I'm actually at the DISTRIBUTECH conference in San Diego at the moment, which is the biggest industry event in the world for distribution, electric utilities. It's really vibrant. You know, I think everyone's fully winding back. We've, you know, we've sold well through the month of January, and delivered pretty well too. Yeah, feeling good about Q4 and the full year.
The follow-up question from the same individual was, will a macro slowdown, i.e. recession reduce CapEx by your customers?
Oh, touch wood. You know, I don't know about it for sure, but I don't think so at all. The demands for the electric grid are just growing so dramatically. Aging workforce, aging infrastructure. You've got to power the electric vehicle market, so you go from having 20% of the energy in the country on the distribution grid to 50%, I think, in 10 years' time. They can't slow down. All this fiber attachment, they've got to harden their networks. You know, climate change, more storms, more hurricanes. I just can't see any way that they can slow down. You know, they're regulated utilities as well, so they don't suffer the same ups and downs.
Maybe the communications market's different, that they can put the brakes on if they don't see consumer demand at the end of, you know, building a network. Again, the customers we're working with, even the tier two ones, you know, focusing on these really unglamorous sort of second tier, third tier rural broadband cities. They're highly committed to building their networks. I think we're very lucky in that respect. We don't, you know, we didn't really suffer through the pandemic. aside from that maybe three or four or five months.
Thanks, Glenn. This person's done their math. J ust said, It appears the net decrease in cash is a function of circa NZD 5 million in investing CapEx. If so, why, and what did you invest in?
That was the first question before. Most of the decrease is just the foreign exchange rate when we put our US dollars and Australian dollars back into NZD for reporting purposes. Otherwise, we've actually been pretty or very consistent. We are still investing significantly in software development and the products that we looked at, but not more materially than what we, you know, had reported in the half year financials.
Thank you. Regarding the expansion into new markets, which ones are you targeting? Will that be by greenfields expansion, or would you consider an acquisition or acquisitions?
I mean, the acquisition strategy is to look at capability to support North America and what we're doing here to extend capability, or to bring us new customers that we can cross-sell and upsell into. At the moment, you know, within our 12-quarter plan, we aren't at the moment looking at significant international market expansion. I think there's some obvious markets. Australia is one. You know, perhaps some of the more developed markets in Asia make sense for us, but we're just completely focused on North America. If we do well, and execute North America, you know, we're gonna build a really big company. We're still small. You know, we're a 100-person business at the moment.
I think having that focus is important because there's real complexity in owning this space. The standards for building power networks, it's not the same globally. It's, you know, it's generally the same, but it's specifically quite different. This is all around being sort of an outright expert for your customers and being a partner that they can trust. It takes real effort, I think, to go into new markets, which we will do over time, but for the time being, we're pretty focused.
Thanks, Glenn, probably have time for one more. There's a few parts to this question. Can you update us with more greater detail on the AI development program for IKE Insight? When are customers seeing these products released? Further, how does this assist your margins via automation?
Yeah, that's a good question. The neat thing is that we have an internal customer in our IKE Analyze offering, product offering, and we're delivering automation into IKE Analyze already, which is helping margin and giving us scalability and those types of things. This is what we've done with a whole range of product features, not just with the AI side of things. We get really comfortable with quality and quality control, and then we're able to package up that capability and sell it into the market more generally. That's what we're doing with the insight function or the AI function at the moment. It's really exciting.
I mean, truly, we eventually will be in a position of doing 90% of what an engineer is doing at the moment, at a cost of hundreds of dollars now. That, you know, it's a big prize, and then you multiply that by millions of assets, and it's a, it's a potentially something that's really valuable to the market.
Okay. That concludes the Q&A segment. I'll now hand back to Glenn for closing remarks.
Thank you. Thanks again for everyone, dialing into the call, and obviously happy to be in touch, if there is any follow-up questions or comments.