Gentrack Group Limited (GTK) Earnings Call Transcript & Summary

Good day and welcome to the Gentrack FY '20 Half Year Results Update. Please note that today's call is being recorded. I would now like to turn the conference over to Mr. John Clifford, Chairman. Please go ahead, sir.

Thank you. Good morning, all. Welcome to the call for Gentrack's half year results to 31 March '20. I'm pleased to be joined on the call from another location by James Spence, who joined Gentrack as CFO in April, following a career in the energy sector, most recently at ERM Power. Turning to Slide 3. Our results for the half to March are clearly disappointing but in line with our guidance of $2 million to $3 million EBITDA given at the AGM in February. EBITDA was $2.8 million on a comparable basis or $4.3 million after the positive impact of IFRS 16. Revenue was $50.6 million, down 7% on last year's comparable period, reflecting the loss of a number of U.K. customers due to supplier failure and acquisitions and a reduction in nonrecurring project work in the U.K. and Australia. Despite this, underlying committed recurring revenue was up 11% at $29.7 million in the half, benefiting from a net growth in meter points with new and existing customers in the U.K. Our profitability was eroded by a significant increase in costs of $6.2 million over the prior year period, principally people in the U.K., as we had recruited in the expectation of growth prior to the U.K. market turning down in 2019. We reduced head count by 65 in February, March this year to address this problem. Statutory NPAT of negative $12.8 million was hit by an impairment of $10.7 million on the Blip airports business, which we acquired in April 2017. The COVID-19 travel lockdown has impacted our airport customers significantly. At Blip, which provides passenger tracking and capacity prediction software, many airports have put a freeze on new projects as well as some smaller customers opting not to roll over annual contracts. This has hit revenue in the second half, reducing Blip to a small operating loss forecast for this full year. This and the uncertain outlook for the timing of recovery has led us to impair the carrying value of Blip's goodwill and intangible assets. We've also taken a write-down of $1.5 million on utility billing software, which we had previously capitalized, following a change of product strategy to rationalize our offering in the U.K. Our operating cash flow in the period was significantly ahead of EBITDA, with an inflow of $8.6 million as we collected [ debts as ] extended at the end of last year in the U.K., and we finished the period with net $6.4 million cash. In the current environment, it's good to be operating in a net cash position with an available debt facility of $20 million from ASB Bank. Our search for a new CEO is ongoing, and we expect to make an appointment in the second half. In addition to James joining us as CFO, Darc Rasmussen joined the Board in December, and he brings extensive experience of enterprise SaaS. In the light of the reduced profitability and the current uncertainty, we will not be paying a dividend -- an interim dividend this year, and we'll review our ability to pay a full year dividend in line with our policy depending on the year-end outcome. Turning to Slide 4. The results to 31st of March were not significantly impacted by COVID-19, but we have seen an impact since then on both sides of the business. The U.K. energy retail market and, to a lesser extent, the Australian market, was struggling before COVID-19 with regulatory price caps on electricity reducing many players to losses. In the U.K., 19 energy retailers have failed or been acquired since 2019. While some of our supplier -- while some of the suppliers that failed through the first half were Gentrack customers, the impact on our recurring revenues was offset by meter point growth in the remaining customer base and revenue from 3 new customers going live with Gentrack billing in the first half. Nonrecurring project revenues have suffered as the new entrant market is stalled, but we are seeing more momentum in the business energy, assurance and water billing markets, and we are still progressing significant projects and new tenders through the lockdown. The economic shutdown has caused increased financial pressure on many energy retailers, with government directives not to disconnect customers for nonpayment, exacerbating the problem. We haven't seen any customers fail since March, but there is clearly some uncertainty in the year ahead. We have seen a number of regulatory-driven projects delayed, including the deadline for industry changes to 5 Minute Settlement in Australia, which will reduce our customers spend with us on these projects in the second half. Whilst we continue to enjoy product leadership in the business energy and water billing market segments in the U.K. and Australia, we have seen strong competition emerge in the consumer market. There is considerable pressure on energy retailers to reduce their operating costs and to introduce new tariff innovation. On the airport side, air travel -- with the air travel shutdown that's obviously had a dramatic impact on airport revenues, which are directly linked to flights and passenger numbers, down over 90% in some cases, with many airports effectively shut. The timing and scale of the recovery is unknown at this point. Overall, we expect our airports division to remain profitable with our systems being mission-critical for airport operations and our charges being a relatively immaterial part of airport operating costs. We are seeing some interesting opportunities for innovation in crowd management and virtual queuing in airports to enable social distancing and some promising early trials of passenger tracking in rail and metro stations. Turning to our strategic focus. Our strategy is to continue to invest to develop the leading SaaS solutions for utilities. Gentrack has over 50 energy retail customers in the U.K., Australia and New Zealand, and we are leveraging best practice from across this customer base to build our next-generation SaaS solutions, lower utilities' cost to serve and enable them to launch new tariffs and products quickly at low cost. Despite our head count reduction, we have actually increased our product development team by switching engineers from customer support as we get more efficient in supporting our customers. We have further productized our solutions for competitive water retailers in the U.K. and Australia, and we're well positioned to offer next-generation solutions for water companies to upgrade from their legacy systems and enable new digital engagement with their consumers. We were also well positioned to support 5 Minute Settlement for energy retailers in Australia with our new cloud-based meter data service. With fewer new entrants in the energy retail space, we remain focused on winning the largest utilities in our markets, covering both the business and residential energy sectors. We are bringing our existing customers onto our new SaaS Gentrack Cloud platform, enabling them, for example, to handle increased volumes of smart meter data. This, in turn, enables us to reduce our cost to support them and gives us the platform from which to sell them additional cloud services, such as revenue and settlement assurance. In the airport market, we are focused on an integrated airport management solution, which brings together passenger tracking and prediction to optimize resource management, enabling, for example, the prediction of peak passenger flows at security and rostering staff to open additional resources ahead of queues building. We are also developing applications to enable virtual queuing, as seen in some theme parks, to schedule passengers through security whilst maintaining social distancing. With that, I'll hand over to James for more detail on our financial performance.

Thanks, John, and good morning, everyone. I'm pleased to be able to join my first Gentrack investor call. I have 4 slides: one on summary P&L information, one with more detail on revenue, a slide on impairment and a final slide on cash and the balance sheet. Starting with P&L information on Slide 6, where you can see revenue, OpEx, EBITDA and NPAT numbers with comparatives for the previous 2 halves. The key standout messages here, our revenue is down 7%, and OpEx is up 15% versus H1 '19 before an IFRS 16 adjustment, which reduces OpEx by $1.4 million related to lease commitments. In summary, what's happened is that in H1 '19, we were growing rapidly in the U.K., particularly in the small energy retailer segment, and we were simultaneously adding cost for further growth. We then suffered material customer losses due to customer failures and consolidation, which dropped revenue sharply while the costs remained until the cost reduction actions, which we have taken in February and March 2020. In Australia, we had material nonrecurring project-specific revenues in H1 '19, which have fallen away in H1 '20. The overall impact on H1 '20 numbers is that we have revenue down around $4 million versus prior period and costs around $6 million higher, with consequent material impact on EBITDA and underlying NPAT, which can be seen in the numbers on this slide and in the waterfall charts. Now that's the bad news. The good news is that we took action on costs in February and March 2020, which will reduce the run rate on costs going forward. Annual cost savings are expected of around $6.5 million to $7 million prior to head count investments required in selected areas partially offsetting this. And there are underlying improvements in revenue, which I will go and talk about now, moving to Slide 7. On Slide 7, where we analyze revenue, you can see the overall reduction in revenue between H1 '19 and H1 '20 is largely coming from the reduction in nonrecurring, i.e., project, and license revenues. Conversely, we're seeing a healthy increase of 11% overall for airports and utilities in our committed recurring revenue. This reflects, for an example, an increase in meter points served in the U.K. business from existing customers. We've also had some important new business wins in the U.K., which have contributed around GBP 1 million of revenue in the half or around 8% of total U.K. utilities revenue, partially offsetting the reductions elsewhere in U.K. utilities. You can see that airports revenue is showing a consistent trend with a substantial increase in committed recurring revenue on a proportional basis. This change in our revenue mix is consistent with our strategy to move to the Software as a Service business model and away from more project-based revenues. Clearly, the revenues demonstrate that in H1 '20, this is a business in transition to that new model. Now moving to Slide 8, where you can see the effect of asset write-downs in the period. Firstly, we have taken a full impairment of $1.5 million of software previously developed for the U.K. retail energy market, which is no longer required having been superseded by our new product offering. Secondly, we have taken a full write-down of the Blip intangible assets of $10.7 million. The business has been impacted by the COVID-19 shutdown of airports, as John referred to. Given the uncertainty facing the business in terms of timing of future cash flows, we have taken a full write-down. Blip continues to play an important role in the overall customer offering for our airports division. Now moving to Slide 9 and focusing on the cash flow and liquidity position of the company. In summary, we continued to benefit from a net cash position with further liquidity -- with liquidity further supported by a long-term facility provided by the ASB Bank. Net cash flow is positive $1.8 million in the period. But as you can see in the waterfall, this disguises what has been a strong half for the business with operating cash flow of $8.6 million before the final FY '19 dividend and final tranche of the Blip acquisition. This favorable performance has been driven by improved working capital management, particularly in the U.K., where we've seen a material reduction in overdue balances. Second half cash flow will benefit from the prudent decision not to pay an interim dividend, which is appropriate given the H1 profitability and the uncertainties facing the economy today. Overall, however, considering this uncertainty, the net cash and the high level of recurring revenue position the business well from a balance sheet and liquidity standpoint. We've gone through a modeling exercise to test the cash flows of the business under various scenarios and consider the business is well placed to weather the storm with existing cash resources and facilities in all but the most dire and prolonged downturn, which we are not seeing in our customer base at the moment. We continue to monitor carefully. Now I'll hand back to John to wrap up. Thank you.

Thanks, James. Well, look, in the -- in conclusion, on the utility side, the economic impact of COVID-19 is creating a level of uncertainty, and there is some risk of further customer failures and consolidation, particularly in the U.K., which could impact us in the second half. On the airport side, we've already seen a significant impact from revenue with new projects on hold until airport operations recover fully. With the benefit of reduced people costs, we expect second half EBITDA to be ahead of the first half and to remain cash positive. Longer term, with our ongoing investments in SaaS products, which deliver cost savings and improved operations and efficiency to our utility and airport customers, Gentrack is well positioned to emerge from the current turbulence and return to consistent profit growth. With that, I will hand over to Jenny, the operator, for Q&A.

[Operator Instructions] And we'll go to that first question.

It's Joshua Dale from Craigs here. Can you hear me?

Yes, Josh.

Excellent. First question from me. You referenced on Slide 4 the emergence of stronger competition disrupting the market with new offerings. I was just curious, aside from Kraken, are there any other competitors that you're seeing emerging?

Yes. I think Kraken has emerged -- Octopus' Kraken has emerged as a competitor in the U.K. over the last year. And of course, they recently did a deal with Origin in Australia, which is exclusive with Origin in this market. We have got a number of smaller competitors in each market. But I don't think the competitive situation, other than the emergence of Octopus, has materially changed. But as I've mentioned, we do have some small competitors in the Australian market and the U.K. market, which we have had for the last several years. And we've been building our market position in light of that.

And just a follow-up question. I understand Origin is a customer of Velocity in the -- for the C&I billing, and also Junifer was installed for C&I billing for npower. With the recent announcements from Kraken being sort of in Origin and also E.ON and npower, does that mean they are retaining Gentrack on C&I? Or is Kraken replacing both retail and C&I?

No. Gentrack is retaining the business billing, C&I function at Origin. In fact, Octopus doesn't have a C&I, commercial and industrial, billing functionality. And so both at npower in the U.K. and at Origin in Australia, Gentrack retains that business.

Okay. That's great. And just a final question for me. Have you had any requests from airports to reduce or defer the fees that you charge?

Yes. We have had some requests from small airports, many of which are effectively shut to defer their fees and/or not to roll over annual contracts. So that has had an impact on the Blip business in particular. On our 2020 side, our core airport operations business, those systems are generally mission critical to the running of the airport. And so we haven't seen as much impact there because the systems are required to run the airport even with any activity. But our general approach has been to look to reschedule the fees from smaller airports and perhaps look to transition them to a per-flight basis, so that when operations recover, we benefit from the change in the long term.

And we'll go to our next question.

Andy Bowley from Forsyth Barr here. I've got a couple of questions. The first of which is around the cost side and the head count reduction that you've made and recognizing that the decisions around this would have been made pre COVID. Do you think those cost measures are enough? Do you need to do more in light of the demand outlook that you've got in front of you now in a post-COVID-type world?

Andy, we've got no plan to make further headcount reductions. We did -- as you rightly say, we made those decisions in a pre-COVID world. Our strategy through this difficult period is to continue to invest in our product. We are switching some of our engineers from customer support over to product development. And as I say, there's no plan to further cut the cost base. We think we are about the right size to continue to invest to ensure we can benefit from the market when it turns.

Great. And can you just confirm what the level of cost reduction will be in terms of the 65 that were taken out on an annualized...

Yes. The cost reduction we are expecting from that is about $6.5 million to $7 million from the 65 heads. However, we are not going to see the full benefit of that in the second half because there have been some selective new cost investment. So we are not giving precise guidance to the cost base in the second half. But we won't see the full benefit of that cost base reduction in the second half. I had indicated at the annual meeting that we expected to see a $4 million reduction. And as we stand now, we don't think we'll achieve that level of cost reduction in the second half.

Okay. And then second question, John, is around the CEO search. Can you give us a sense of where you're up to? And then also, what are the kind of the key skills and experiences that you are looking for in the new CEO? In essence, what mandate have you given to your search agents?

Yes. We're looking for a CEO who has experience of enterprise SaaS-ware businesses and driving that conversion of the whole of a company from traditional license and software project business to being a SaaS service delivery organization. And in terms of where we are with the search, we have a shortlist of candidates that we are currently engaged with, and I'm hopeful that we'll bring that to a conclusion in the next 3 months or so.

And we'll go to our next question.

It's Shuo from Microequities Asset Management. Just a few questions. First, in terms of your utility customers, have they -- have any of them asked for, I guess, payment deferrals or price reductions and payment terms? And whether the business, as a whole, you've got any periods where there's more intense collection periods. I noticed your receivables has come down. But throughout the year, is there any more intense periods of cash collection coming up that might present a challenge in the current environment?

Shuo, yes, we have seen some smaller energy retailers are under some cash pressure mainly because cash collections for them have been stretched. We have seen some requests for deferrals, but it hasn't had a material impact yet on the business. We don't -- I think the position is slowly improving at the moment because of various government schemes to assist the energy retail sector in the U.K., reliefs that they have provided to payments they have to make into the market. So we have seen some requests for deferrals on payment. They haven't been material, and we don't think the situation will deteriorate. The uncertainty, of course, comes from the possibility of suppliers failing in the next year. And it's quite hard to predict what those outcomes will be. Often, rather than failing, of course, the -- what happens is the energy retailer sells its book to another company, and that company is one of our customers. We don't lose -- we pick up revenue with the growth in meter points at the new retailer. But obviously, the risk is that if they go to a retailer who's not one of our customers, we can see a hit to revenue.

Okay. I understand. Just a second question. Just on Slide 7, the revenue mix. Can you just give an indication of what proportion of SaaS revenue is now comprised in both the utilities and airport segment?

So Shuo, we don't split out the SaaS revenues from our committed recurring revenues. Almost all of the growth in our committed recurring revenue over the last 3 years has been fast, and we're slowly converting our legacy customer base over to that. But we don't split that out further. So the $29.7 million recurring software revenue, it's all in the nature of SaaS. It's contractually committed for a service.

Okay. I understood. And just going forward, as you sign more -- obviously if you sign new customers with SaaS, how does that impact the -- that upfront project implementation revenue? Does that -- like, how much does that shrink on average for a new implementation project?

So the thing that we don't get, obviously, in a SaaS sale is the upfront license fee. We do tend to charge the customers implementation services for installing it. So typically, we might have lost on a typical sale an upfront license fee of $1.5 million, $2 million. We do get some implementation services for installing the software. But we benefit, obviously, from a higher -- long tail of revenue.

Are you saying the implementation revenue remains unchanged under the old model and the SaaS model?

No, there is often a reduction in the implementation services, but we do still look to recover our costs from installing the software in implementation services. So the main hit is the loss of the upfront license fee.

And we'll go to our next question.

John, pretty incredible result given the environment. Just you talk about the risk of continued U.K. energy failures could impact second half 2020. Just -- I know you can't really kind of get really kind of detailed here. But what's really happening? And broadly, what should we think about as a risk for Gentrack? This is Andy Gracey, Australian Ethical.

So the -- there's been a couple of impacts on energy retail, particularly in the U.K. Firstly, obviously, there is the stretched collections. People aren't paying their energy bills as quickly, and particularly in the consumer market, there's some canceling of direct debit mandates and so on. And there's government directives not to disconnect people, which have sort of exacerbated the noncollections problem. Some energy retailers, particularly those focused on the business sector, the SME sector, have seen a very significant drop in demand compounding that problem. And then the -- there has been a third impact in the energy retail space, where the forward price of energy has fallen significantly in Australia and the U.K., and many energy retailers buy forward. And so they found themselves committed to higher prices than the market price and had to liquidate those positions in the markets at a lower spot price and so suffered some losses. So there's been a triple whammy on some retailers, those worst-affected, folks from the SME sector. We haven't seen any customers fail since the half year. And we have looked very carefully at our customer base, obviously, and we think we understand what the impact will be in the second half. And notwithstanding that, we have given guidance that we expect second half EBITDA to be ahead of the first half. But it does introduce the level of uncertainty we have -- which we have to acknowledge.

There are no other questions in the queue at this time. I'll turn the call back to the presenters at this point.

Okay. Well, look, we have a number of meetings with investors over the next couple of days. Thank you for attending on the call. As I say, just to make a remark in conclusion, Gentrack's strategy through these difficult times is to continue to invest in our products and product functionality. And ultimately, those deliver cost savings and improved operations to our customers. And I think the demand for -- particularly in the utility sector, for systems to reduce cost to serve and to bring in new tariff innovation will come out of these difficult times stronger than before. And Gentrack is very well placed with over 75 utility customers to build on that customer base and emerge from this difficult period and return to consistent profit growth. So with that, I will close the call. Thank you.

And again, that does conclude the call. We'd like to thank everyone for your participation. You may now disconnect.