How Derive Systems Hit $40M Revenue and 35% Growth With 50 Enterprise Customers (Interview with CEO John Oechsle)

Introduction: John Oechsle and Derive Systems

Nathan Latka

00:00Hey, folks. My guest today is John Oechsle. He's the CEO of Derive Systems. Now, may look familiar because he's been on the show many times with a different company, Swiftpage. We'll get that story in a second. He's now focused again on VQ efficiency for engine calibration. Slight difference slight difference from Swiftpage. John, are you ready to take us to the top?

John Oechsle

00:18>> I'm ready, man. Good to see you.

From Swiftpage CRM to Engine Calibration

Nathan Latka

00:20So how do you go from Swiftpage to engine calibration?

John Oechsle

00:24>> You know, the underlying factor there is technology. Right? So as long as technology, whether it's CRM or auto tech, you know, it's all it's all about bits and bytes, you know, for sure. But yeah. No. I mean, we were Swiftpage for a long time and really really had a lot of fun growing growing that business. We sold that off to SFW Capital in, like, mid two thousand eighteen. I kinda stayed on as CEO for about a

00:49>> year and a half to help with the transition. We put Steve Oriola in in the in the seat there. And then I transitioned over to the to the board officially at the end of twenty nineteen. And because I I just can't sit still, Nathan, I I had to, you know, do something else. I ran into a a private equity firm called Global Environment Funds, GEF, and they had Derive Systems. And, they, somehow convinced me to, to

01:17>> come on board. And, and as we were talking earlier, my first day on the gig, 03/16/2020. And if if everybody remembers that, that's, you know, that's when we said, hey. Everybody lock ourselves in a room and three for three weeks, and we'll flatten the curve. So I walked in the door, and it's everybody. I said, hey. I'm John. Everybody go home.

Nathan Latka

01:39Let's unpack this story here real quick. So 2018, you sold Swiftpage. Now were you running Swiftpage on behalf of a private equity firm or did you own a majority of that business?

John Oechsle

01:48>> We we were running out. Yes, we were running that on behalf of a private equity firm, a couple firms. Accel KKR, Jump Capital were the main players in Swiftpage at that time.

Nathan Latka

02:03And so just to close out that story, what did you guys sell it for to SFW?

John Oechsle

02:09>> I can't give you the exact number, but I will tell you that everybody was extremely, extremely, extremely happy.

Nathan Latka

02:16Can you give me a massive range that won't get you in trouble above or below a 100,000,000?

John Oechsle

02:22>> Let let's just say, 100,000,000 is yeah. Yeah.

Nathan Latka

02:28The answer is yes. Yeah. Somewhere in there. Okay.

John Oechsle

02:32>> I'm here in that role. Yeah.

Nathan Latka

02:34So John, you're super active in the Colorado sort of startup ecosystem. Is that who you came across GEF? How'd they find you?

John Oechsle

02:41>> You know, they found me yes. I mean, I'm connected with the startup world for sure. I'm connected with a ton of private equity firms and and as a very incestual kind of group. You know, one firm will be talking to another firm and say, hey, you need to talk to this, you know, to this guy, etcetera. And that's how I ran into into GEF.

Nathan Latka

03:04So they why do they make a connection and say, well, this x CRM and sales automation guy will be a great thing to put on Derive Systems? How did that connection happen?

How GEF Built Derive Systems in 2013

John Oechsle

03:13>> You know, it's it's about leadership, quite frankly. You know, if you look at Derive Systems, Derive Systems has been around for a long time, so it's not a startup. Wait. We made it launch. It it it actually, GEF launched this in 2013. It was a combination of a of a couple of different companies coming together. So I'll I'll I'll give you that, story here in a second. But, you know, it it had gotten to a point

03:36>> where it had lost its way. And, you know, what I'm known for is a leader that comes in, rapidly understands what's going on, rapidly understands what need what needs to be done to fix it, and then more importantly, rapidly putting in place a plan to grow it and and increase value. And so, you know, that that's how they came about across me, and they said, you know, are you up to the challenge? I said, oh my

04:02>> god, absolutely. This is a lot of fun.

Nathan Latka

04:04Want me to give you the thirty second history on Derive?

John Oechsle

04:08>> Well, let's talk about the product

Nathan Latka

04:11though quickly first because you have three product lines that this SCT product, a thing called Bully Dog and then DeriveVQ. I guess, who first, who is the buyer? Who is buying this stuff?

Two Business Units: Enthusiast and Enterprise

John Oechsle

04:22>> So let me give you a quick lay of the land. Think of Derive as a company with two business units and three brands. Our two business units are the enthusiast business unit. So that's any car enthusiast. So if you got a Mustang or, you know, a a jeep or a a a a pickup truck, etcetera, and you wanna tune it and get more power out of it, etcetera, that's what's called a car enthusiast. And so that's

04:47>> one business unit. And then the other business unit is the enterprise business unit, which is more corporate fleets and fleet management, etcetera. And then as you mentioned, the three brands, S E

Nathan Latka

04:57T Wait. Who would be that? What's an example of a corporate? Like, McDonald's delivering, like, trucks or their Yeah.

John Oechsle

05:02>> You could do that. But, you know, our one of our largest customers is Comcast. Right? They have 26,000 vehicles in their fleets. You probably see them driving all around the the Xfinity, little vans and pickup trucks, you know, etcetera. Verizon is another one, Safe Flight. You know, we can kinda think about that. Amazon's got huge

Nathan Latka

05:21So how would they use your product? They're using it to get better gas mileage or better route plan or what?

Enterprise Product: VQ Efficiency, Telematics and Safety

John Oechsle

05:27>> So in in the enterprise space, the VQ platform, the brand VQ platform has three applications that hang off of it. VQ efficiency, which is one that we're getting the most traction in the market right now, VQ telematics and then VQ safety. So let's let me talk about VQ efficiency. And what we do there is we actually tune the engine to get the maximum fuel efficiency and the maximum carbon reduction. We can also set speed limiters and

06:00>> things along those lines. So a company like Comcast has got, you know, that portion. They've got our entire platform, but just on that portion alone, they're saving $8,500,000 a year on fuel. But more importantly, there's 24,000 metric tons of carbon that they're eliminating from the atmosphere or from the environment every single year.

Nathan Latka

06:22So you're going to meet their ESG targets then?

John Oechsle

06:25>> Absolutely. Absolutely. You know you know, who's our buyer? Most of the time on that side, it's it's the fleet operator, but we're also getting, you know, the corporate risk officer and the chief sustainability officer that, you know, are are contacting us to to help them out. Mhmm. So that's in the efficiency. VQ Telematics, are you familiar with telematics? I mean, that's been around for forever. Right? I mean yeah. We're not a telematics player. We don't have

06:50>> telematics software. What we do is we integrate with all the big telematics players out there, the Geotags, Asperions, the fleetmatics, etcetera. We actually use them as a channel to get to the customer. And so we're kind of an open platform on that side. We have a very light telematics platform that if somebody doesn't have something, you know, we can put in place, but we're that's not where we really compete. And then VQ safety is really going

07:17>> after two other big issues that these fleets have, and that is speeding and distracted driver. And so we have a distracted driver prevention application, and we have a dynamic speed control where based upon where you are like, if you're a fleet operator, you say, hey. I don't want my my fleets to go any more than 10 miles over the speed limit no matter where they're at. And we're able to dynamically understand where you're at via GPS,

07:45>> understand what speed limit is, and then set it so that your vehicle, if you go over that 10 miles, it's a very, very annoying thing for the driver to Got it.

Nathan Latka

07:55Break down the importance of these two cohorts, car enthusiasts and enterprises, in terms of your top line revenue. Last year, what was the revenue split between the two?

Revenue Split and Growth Rate

John Oechsle

08:04>> So revenue is 75/25 right now. So think of it think of the enterprise 75 what? 75 enthusiasts, 25 enterprise. Right? So just to give you an idea, we're this year, we're on track to be about a $55,000,000 company. And the split is still gonna be the same of seventy five twenty five this year. The challenge is is that, you know, the enterprise business is a rapidly growing business, and that's going to take off like crazy.

08:33>> What is it?

Nathan Latka

08:34If you do 55 this year, Joel, what would that be up from last year?

John Oechsle

08:38>> We are going to be right now, first half of the year, we're up 35% year over year. Sorry, John. I'm

Nathan Latka

08:44just on with another founder named Joel, then obviously, John here, but so up 35%. So what you finished last year at around 40,000,000, something like that?

John Oechsle

08:54>> Yeah. A little bit. Yeah. A little bit more than 40,000,000, but yes.

Nathan Latka

08:57Mhmm. And how much of that is software?

John Oechsle

09:00>> Almost all of it is software. We do have devices that we sell that, but the device is only used to deliver our software. So on the enthusiast side, we sell these devices, right, And you use that to plug in your OBD two port, but that downloads the software and is the software.

Nathan Latka

09:20Piece of hardware?

John Oechsle

09:22>> I'm sorry?

Nathan Latka

09:22How much is that piece of hardware?

John Oechsle

09:25>> How much is this is the hardware?

Nathan Latka

09:27Yeah. If a car enthusiast wants to use your software, they have to buy the hardware. How much is the hardware?

John Oechsle

09:31>> It ranges anywhere from $299 to $499

Nathan Latka

09:34$299 Yep.

John Oechsle

09:36>> To $499 Interesting.

Nathan Latka

09:38And do you make all that money or it's mainly that you're selling it at cost to get in software?

Gross Margin and Hardware Economics

John Oechsle

09:42>> No. We actually make a gross margin on the enthusiast business is about 61%.

Nathan Latka

09:48Just So the hardware or including the software revenue?

John Oechsle

09:51>> That includes everything. That includes everything.

Nathan Latka

09:53What's the margin on just the hardware?

John Oechsle

09:57>> Yeah. I got to be careful here because I got a big distributor network that I got. We make pretty good money on the hardware.

Nathan Latka

10:07Got it. Okay. Got it. So I guess we don't have to know your actual numbers, but in theory, what you were saying is you are focused on making money both on the hardware sale and the software sale. You're not using the hardware as a loss leader to get the software installed.

Enterprise SaaS Model vs One-Time Enthusiast Sales

John Oechsle

10:19>> Correct. And so if you if you look at the businesses, so the two business units, very, very different business. We actually run them very separately. The enthusiast is a b to c play, right, where we have a big distribution channel as well as direct and ecommerce, etcetera. But it's primarily a one time sale, Nathan. So that, you know, people get we're trying to figure out ways to get that into the recurring world, but it is it

10:46>> is a one time sale. The enterprise, totally different. Right? It's mainly software, and it's all, you know, SaaS based, subscription based, recurring revenue, etcetera. And so that, you know, two very, very different business models. The you know, just to give you an idea, the the enterprise business, which is really the fast grower, it grew first half of the year 43%, 44% year over year. And then the enthusiast business grew about 30% year over year. Now the

11:18>> challenge is the enthusiast business, it it's really growing twenty and twenty one. I really turned the business around and grew it a lot. It the enthusiast business is probably more like an eight to 10% top line grower with a 30 to 35% EBITDA margin. So it's a it's a very steady Eddie business that throws up a lot of cash, lot of EBITDA. And then you've got, you know, this fast growing SaaS based model over here. And

11:42>> the way that we did it is we took the technology. So the technology is is really the secret sauce of of this business. In the enthusiast world, what do we do? We read from the end the engine's ECU, which is the computer on the engine. We understand, you know, what are all the what's the data. We make changes to that data, and then we write back to the engine again. Right? So we we we do that.

12:07>> And on the enthusiast side, you're doing that to get more speed, power, torque, etcetera. Then we took that technology, and we said, hey. There's an adjacent market for this, and that's really the the enterprise business. If we took that technology and instead we read from the from the engine, we make changes, but just to do the opposite, to make it more fuel efficient and more carbon friendly, And that's really the secret sauce. In the enterprise fleet

12:32>> management space, nobody's doing that. Everybody's reading from the ECU to do telematics and all that other kind of stuff. Nobody is really writing back to it. So that's why we we have this really interesting, cool, you know, VQ efficiency that's going on. I got a a crap load of numbers I'm gonna throw at you here in just a couple minutes, but I'll let you get a a couple words in.

Nathan Latka

12:52Well, yes. So tell me on the SaaS side, on the enterprise side, what's the average enterprise customer paying per month?

Enterprise Pricing Per Vehicle Per Month

John Oechsle

12:57>> That ranges anywhere from $14.99 per vehicle per month up to $29.99 per vehicle per month, depending on what package, VQ efficiency, VQ safety, you know, etcetera.

Nathan Latka

13:11Got $15 per car per month.

John Oechsle

13:14>> No. Four $14.99 to $29.99. Right? So this is the biggest no brainer in the world. Right? If if you think about, you know, if if I'm Comcast and I'm paying, you know, $21.99 a month, I'm saving $35 a month on that on that basis.

Nathan Latka

13:32Yeah. If Comcast signs up 26,000 cars with you times $15, I mean, that's a $400,000 a month contract. Mean, you probably have some value discount, but in theory.

John Oechsle

13:40>> Yep, there you go. And we do all kinds of other stuff too. They're one of our largest customers. They're, yes, multi million.

Nathan Latka

13:46How many total customers do you have there?

50 Enterprise Customers and 900,000 Vehicles

John Oechsle

13:49>> In the enterprise side, we're probably getting close to that 50 range now.

Nathan Latka

13:5450. And how many total vehicles are made managed through your platform on a paid service?

John Oechsle

13:59>> So on the enterprise side, it's we just got these numbers yesterday. We're just hitting around 900,000 vehicles. So it's really, really exciting. All total across, we've got over 2,000,000 vehicles that are running our technology throughout the years.

Nathan Latka

14:17Including enthusiasts plus the enterprise. Now, John, if you have 900,000 vehicles, obviously there's volume discounts here because at $15 a month a pop, that's like 13,500,000 a month in revenue.

John Oechsle

14:27>> Yeah. So here's the problem, right? When I stepped in, they were not doing this as a subscription based. They were selling this as a one time. They were selling it anywhere from, you know, one time shot of $200 to $150 or whatever. So the model was way off. So yeah, we're not 13,000,000 a month in revenue yet, but we'll get there. We'll get there.

Nathan Latka

14:54Yeah, I mean, sounds like you're closer to something like 4.5, 5,000,000 a month right now in revenue. If you're gonna finish this year at $55,000,000 run rate. Is that accurate?

John Oechsle

15:04>> Yeah. Across across both business units. Yes.

Nathan Latka

15:07Yeah. And we know enterprise is 25% of the 5,000,000 a month. So about a million and 0.5 or million ish is coming from the enterprise side based off

John Oechsle

15:15>> of Got the numbers, brother. You got the numbers.

Nathan Latka

15:17And is this pretty sticky? People don't churn once they pay for the hardware, get it all installed. Right?

John Oechsle

15:21>> Correct. Correct. And we we have you know, in fact, it's so sticky that as these enterprise are buying new vehicles. Because what you have on these fleets is that old vehicles go off, new vehicles come on, they're bringing in new vehicles, we're getting those vehicles as well.

Capital Structure: GEF and Energy Impact Partners

Nathan Latka

15:38Now, you're obviously backed by private equity here. So, I mean, you guys thinking about raising additional capital? How much has the business raised since 2013?

John Oechsle

15:49>> So the business has raised, you know, it's difficult to say because GEF came in and the way that they formed this business is they acquired SCT, was a standalone company and that was based out of Florida. So we have big offices in two big offices right outside of Orlando. And then they acquired Bully Dog, which was based in Idaho. So we have an office in Idaho. And that formed Derive Systems, the enthusiast side of the business.

16:21>> And they put in a lot of capital to do that, and then put in a few more some more capital over the years to kind of spin off the enterprise business. But when I came in, I refinanced the debt very, very quickly. We took out the player that we had in there. I brought in Energy Impact Partners, our EIP as a debt provider. So if you think about it, now have an ESG debt provider and an

16:51>> ESG, you know, private equity.

16:55>> And now they're lot 20,000,000.

Nathan Latka

16:57Okay. Got it. And and cost capital under 9% interest?

John Oechsle

17:01>> Yes.

Nathan Latka

17:02Okay. Cool. Like LIBOR plus, like, one

17:05or two under 5%?

John Oechsle

17:06>> Yep. Yep.

Nathan Latka

17:07It's got pretty darn good.

Team Size and Office Locations

Nathan Latka

17:08What's team size?

John Oechsle

17:09>> We a very good deal.

Nathan Latka

17:09Very good deal.

17:10That's a good deal. Yeah. What's team size today?

John Oechsle

17:13>> About 170, 175. And just split up, you know, we're based we got Broomfield, Colorado, Idaho, Pocatello, Idaho, and then Sanford, Florida.

Famous Five: Books, Tools and Personal Life

Nathan Latka

17:27Very good, John. We're out of time here, help a story. Let's wrap up with the famous five. Number one favorite book.

John Oechsle

17:32>> Hey, the one I'm worth reading right now, I've actually got two. The CEO Test. If you've ever read it, it's really, really cool. It's a it's a book that, you know, you kinda look at and and, you know, test yourself as where am I at as CEO. So it's pretty good. The other one is called Buyology, and then Buy is spelled b u y. So it's a marketing, marketing play there. So that's a that's

17:52>> a cool book too.

Nathan Latka

17:53John, number two, is there a founder you're following or studying?

John Oechsle

17:56>> So this is weird. You know, I'm all over the place, but right now, I'm I'm really into Elon Musk.

Nathan Latka

18:01Number number three, what's your favorite online tool for building a business?

John Oechsle

18:05>> So right this one right now is is m is Microsoft Teams. It saved my my life, quite frankly. As a as a new CEO coming in and trying to get to know everybody in the organization, if I didn't have that online tool, we would not have been able to do that. It's something we use every single day to stay connected as we're all working remotely now.

Nathan Latka

18:31Number four, how many hours of sleep do eat every night?

John Oechsle

18:34>> I get seven hours of sleep.

Nathan Latka

18:36That's great.

John Oechsle

18:37>> That situation, married single kid?

18:40>> Married, four kids, five grandkids.

Nathan Latka

18:43Wow, and how old are you, John?

John Oechsle

18:45>> 59.

Nathan Latka

18:46Take us back, someone you wish knew when you were 20.

John Oechsle

18:49>> When I was 20 years old, I wish that I would have been more like Bill Gates. When I was 20 years old, it was 1982. So you probably weren't even born back then. Nope. But, you know, I wish I would have been more like an entrepreneur. I was I was actually a a sophomore in college. I was I was quarterback of the football team, and I was thinking I was going in the NFL. But then I

19:16>> really said, no, I got to go into corporate America. I wish I would have went more entrepreneurial back then.

Nathan Latka

19:20Guys, there you have it. He sold Swiftpage to SFW Capital mid twenty eighteen, sat on board in 2019, then got bored and ended up getting in sync with a new private equity firm who owned a company called Derive Systems, that was GEF. He's now running Derive Systems. The business did about $40,000,000 in revenue last year, 75% on their consumer business, another 25% on their enterprise side. Enterprise growing very quickly though. They sell hardware, but then really

19:43what they do is they then upsell software that enables you to get better engine performance, speedometer, Comcast can make sure their trucks don't drive faster than 10 miles per hour in certain zones. They're scaling quickly with 50 enterprise customers and over $5,000,000 in MRR, hoping by the end of the year this year. John, thanks for taking us to the top.

John Oechsle

19:59>> Thanks, Nathan. Good to see you again, bud.

Nathan Latka

20:02Thanks, man. Take care.

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