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IkeGPS (IKE.ASX) : Deep Dive
Small, fast-grower tackling a big problem to keep the lights on
Born out of Wellington, New Zealand and now operating from Colorado, Ike GPS sells software and hardware that helps Utilities and Telcos deploy their networks much faster, and make necessary quality assessments on their networks.
IkeGPS came to my attention a number of years ago when I heard their CEO Glenn Milnes present at an event. I found Glenn to be great CEO material; a little introverted, very ambitious, one with skin in the game, and seemingly focused on the right objectives. All delivered with a nice kiwi accent.
Ike’s recent spike in growth to very impressive numbers showcases good execution, and I expect it might be a sign of building momentum in the years ahead.
Their business model is not a simple Saas ARR model though, so one has to do a little more work to dissect how things work under the hood. Let’s get into the company and put some thoughts down on what to watch for in the future.
🖐 4 bullet Summary
The bull view: IKE continues to win large, sticky new logos in the USA. Their customer focus unlock deeper account growth and they become a dominant player in a small niche, getting to the $100M revenue mark within the next 5 years. If this happens, the company will be revalued to match industry peer valuations.
What the market is missing:
How early their market is in the digital transformation journey.
How many more workflows they can digitise to create new products.
Key risks: Big competitors, products very sticky after they are implemented, only targeting the USA at the moment, and still burning cash.
Bear case: Loss of key leadership or key customers create setbacks. Competitors and newer software that’s easier to use and implement comes along and starts to eat up at their growth, and eventually customers churn away from IKE.
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IKE was founded in the early 2000s by Leon Toorenburg who remains the CTO to this day. Leon appears to be a deeply technical founder, his numerous U.S. and international patents on measurement technologies are a sign of this.
In 2005, they raised a $1,390,000 Series A Round from No 8 Ventures. They raised other rounds subsequently.
As most startups do, they would have gone through a series of pivots to find product market fit. In 2013, this led them to getting into the development of electric utility solutions after noticing a strong demand from U.S. utility customers. Shortly thereafter, General Electric (G.E.) made a strategic investment & signed a global trademark license agreement for IKE's MapSight product.
They listed in NZ in 2014, and on the ASX in November 2016.
In August 2021, A$23.6m was raised through underwritten share placement and an oversubscribed share purchase plan to fund the acquisition of Visual Globe's A.I. platform, and help with further growth in the US.
🥊 What problem do they solve?
Traditional deployment and maintenance of electric utilities is a very manual process. Often replacing in-house, legacy systems, or paper-based systems, IKE's products combine technologies to create actionable engineering insights.
Building and maintaining electric utility and communication network assets is complex, with digital transformation continuing to affect more industries, operators and engineers are currently seeking ways to create efficiencies and speed up assessment, construction, and maintenance. This is what IKE allows them to do.
IKE targets two large segments:
IKE software products support poles, wires, and attached infrastructure applications, often with cross-ownership or usage (often the cable TV wires attach themselves to the same pole as the power distribution, etc..)
These are critical infrastructure assets with extremely low thresholds for acceptable downtime, and government regulated maintenance schedules.
Additionally, the growing shortage of skilled staff in these industries is driving further demand for processes helping with efficiency improvements.
They offer 4 software solutions:
IKE office Pro: This is their workflow software to get into the field. Data syncs into the cloud, engineers can see the distribution power pole details.
IKE Structural: This helps turn real world analysis into a CAD model. This is important for loading analysis. Ie when a storm strikes, test the strength of the asset.
IKE insight. This uses computers to do the engineering work. Could mean processing drone imagery and satellite imagery to get insights on power infrastructure. Helps engineers pull out interesting asset information.
IKE Analyze: The newest addition to the family offers customers the ability for the IKE team to perform the engineering analysis for them.
As you can see when they report their key metrics, IKE makes money in 3 ways:
Here’s how the 3 work:
IKE customers can choose to use their own hardware to capture data, or purchase IKE’s hardware.
Then, they will have to purchase subscriptions per headcount. If the software starts to get used by more people internally, subscription costs will increase.
Transaction costs happen because IKE aligns their business model to the way the industry does business; the industry preference is to price per asset. Hence, every time a customer puts a new asset through the software, IKE will charge them an engineering fee.
One thing that will leave a few investors to raise eyebrows is the margins. If this is a software company, why aren't margins in the high 80-90%? We’re now seeing transaction margins bottom to 38%, why is this happening?
The answer is because both the insight and analyze products are in the early stages of development. With these products seeing significant demand, the IKE team will have to do much more manual work to pull out the insights from customer’s datasets.
Over time, as commonalities are found, and the trained ML models continue to improve, the gross margin on these products will improve too (more machine doing the work, less human work). This said, I don’t expect these to become 90% GM products, so I assume IKE margins over time to be more in the 60-70% range.
A Focus on Customers
In this industry which adopts a real long-term view (asset management plans are created with a 20+ year view), your customers have to believe that you have to be in this for the long haul.
IKE’s strategy is to build long-term differentiation via three interrelated 'swim lanes' that cover the following:
Analysis and management
Customer experience (CX): being the partner that customers cannot imagine living without
One of the ways they showcase their focus on customers is through their customer council.
This allows them to bring key industry leaders together and hear and get deeply curious about what they believe would help improve their products.
Having a quick look online, it seems IKE does not escape the challenges of building a fast growing early-stage company.
On Glassdoor, comments are made about difficult KPIs, high employee turnover, a challenging culture clashing between NZ and the US, and misalignment in the leadership team.
It’s hard to pull out objectivity from disgruntled leaving employees. Harder still to evaluate a culture from the outside, but still, we can see growth pains. Leadership will have to continue to invest in building a culture of trust, whilst balanced performance with longevity and wellbeing.
We can see from the above that the company is currently growing its sales and business development teams most. That’s a good sign. Recent performance suggests this is likely wise and reasonable considering a recent tip into profitability.
Years of building relationships and developing quality products allowed IKE’s growth to kick into gear last year.
Growth for FY22 came in at 85%, and I anticipate growth this year to be within the range of 60-80%.
Maintaining growth above 50% consistently for years is likely unsustainable, but it feels like they have well and truly found strong product market fit, and I expect from the team strong growth to continue in the future.
A more realistic growth assumption, in the 30% to 40% range might not be unreasonable to expect from them.
If this is achieved, then they will reach the $50M revenue mark with end of FY25, and the $100M revenue mark by Fy27 or FY28. Of course, this assumes no major roadblocks or curveballs, so don’t take anyone’s word for it.
Split between Broomfield, Colorado and Wellington, New Zealand, IKE’s leadership team looks experienced and diverse.
I once heard Glenn in an interview mention that every 90 days, the leadership team will have a 2 day offsite, to do a quarterly business review, and set the key objectives for the next 12 weeks. That’s a practice I’ve be a part of at companies in the past, which I think pay dividends over the long term.
The GTM leaders seem to average around 20+ years of experience, with likely long-standing relationships in their industries. Here are the senior sales leaders:
Chris DeJohn - SVP of Sales and BD
Carl Almeter - Vice President Utilities
David Creech - Sr Director of Sales
Glenn has been with the company has CEO for more than 10 years. He’s quite the illustrated man, having been a professional cricketer (playing for Central Districts in New Zealand, and also in Britain and the Netherlands) before entering the world of business. His 10 years in the business and the accumulated stake he’s grown through the years show some clear skin in the game.
From what I could find, it appears that he’s been compensated north of $1M for the year FY22. That seems a little ambitious for a company still below 100 employees, but great CEOs will have a outsized impact on the company’s success, which we’ll monitor closely in the future.
In my opinion, 3 things make now an interesting time for IKE. These things will be interesting to keep an eye on in the future.
A growing, and quickly digitising industry offering continued tailwinds
New, more-advanced products to get deeper in the workflow (Insight and Analyze)
A recent turn to profitability (let’s see if they can maintain and grow in this direction)
Two years ago, investors may have looked at Ike thinking valuation alone was quite the risk, given it was close to 10x revenue. Since then however, the revenue has grown significantly, and with the valuation not having moved much, this risk is now reduced.
As always, there are plenty of risks with small, fast-growers in their early days.
The risks I see now are:
Priced for growth: As per my comment above, whilst valuation has been reduced with the company’s execution in the last 2 years, with their gross margins at 52%, this company remains priced with expectations of growth. If growth stalls, then the market will not look favourably on fast growers loser steam.
Cash Burn: Ike have historically burned lots of cash in their effort to cement their competitive positioning amongst existing players in the industry. We’ve seen negative 100 to 200% margins many times in the past. Whilst it was pleasing to see a maiden profit in the H1 results, I classify them as cash burner still. Leadership have indicated many times they will not need to raise cash for continued operations, but this remains a risk.
Competitive Landscape: All existing players seemed to me to be bigger companies. Given Ike’s product span a large workflow, they have competitors from different areas. Larger and more established super enterprise software firms (GE Energy, Oracle, Intel, Esri, Schneider Electric, and others) compete with them, both directly and indirectly. These big players may see the sector’s growing demand for tech applications as an opportunity and disrupt IKE's niche. As Glenn said though, it’s hard to think this will be a winer takes all market, so let’s see how the dynamics evolve.
Key leadership loss: With Glenn having led the business for the last 10 years, and Leon still leading the tech arm of the business, they would unknowingly be retaining critical IP in their minds that they continue to relay to other leaders. The loss of any of these key leaders could led to some hard-to-overcome setbacks.
In these deep(ish) dives, there’s always a lot of important dimensions I don’t cover; a full deep dive is simply too long for me to write weekly. Perhaps I’ll split some of these in two parts. If I did for write further about Ike, I would cover the competitive landscape, go into more depth about use cases, talk more about the industry tailwinds, and dive deeper into the numbers.
I’ll remind you as always that this is article contains only my opinion, and nothing should ever be construed as financial advice. For those of you interested to learn more about them, given Ike operates on the NZ calendar, they typically release full year results at the end of May, and their preliminary report at the beginning of May. The stocks remain thinly traded, so I certainly wouldn’t be making a decision before the full year report comes out, especially given its release pending so soon.
Let’s see what they can achieve this year. Thanks for reading all. Feel free to leave a comment about things I missed, your contrarian opinion, or anything else relevant.
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