Gentrack Group Limited (GTK) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Gentrack Investor Briefing Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Gary Miles, Chief Executive of Gentrack. Please go ahead, sir.

Thank you, Paulina. Good evening from me here in London. I think it's most of the attendees' mornings. And we even extended a little bit further to what come for any kind of far-field Americans that are may be out there for a happy Thanksgiving. This is my first Gentrack investor meeting. I'm very excited to be here. We thought that since I'm a new face in the -- for many of you, that we would start with an introduction from myself about my background and the applicability of it to this market and Gentrack. Then James Spence will take us through the financial results. I will spend the end of the session talking about our forward focus on our priorities, and then we'll open it up to Q&A. So let's get started. So a little bit about myself. I've been in a leadership position running B2B software and services companies for more than 25 years, okay? A lot of it in the telecommunications space, real-time systems. I have an entrepreneurial and innovative edge, founded and ran and exited 2 successful companies from start to finish. Both of them were once again in the B2B and customer experience, real-time revenue management spaces. The last one, I was part of a company called Amdocs. If you don't know Amdocs, it's a $4 billion revenue business, NASDAQ listed, a leader by far, providing customer information systems to the telecommunications industry. All the big players for -- not all of them, but many, many of the world's big players depend on Amdocs to modernize their systems and provide their customer information systems around the world. I was on the executive team at Amdocs for 12 years, working with that organization, and many functions. I ran marketing. I was a CMO. I had also CTO under me, strategy. I was a point of interface for all the multiscalers in our cloud strategy and programs. And I ran 5 different units of development and innovation to -- continually to diversify and bring new things to Amdocs. I want to talk a little bit about some of the learnings that I had in these 3 companies that I think are very applicable to what we see at Gentrack. First of all, there are some aspects of Gentrack that are turnaround aspects. This is already in process, by the way. But I have extensive turnaround experience. So I'll give you an example. One of my stats, I took on an organization of several units inside Amdocs, about 750 people, which is losing money at the time, low employee engagement. And within a year, we headed to double digit profitability. We had operations from 5 countries down to 3. We put order in and focus across the organization. And this is an example of a turnaround that I think brought a lot of momentum and growth to the overall organization. Technology infusion is easy to do in a start-up. It's hard to do in a scaled-up business. What's exciting -- first of all, if you're going to do technology infusion and a midsized business like Gentrack, it has to be a CEO program led from the top. The exciting thing about Gentrack is unlike start-ups, Gentrack has the muscle. If you put all kinds of cloud technology into the way the business operates, it has a muscle to modernize the industry and help our service providers take that step, okay? Innovation while operating is also hard to do in an existing run rate business with customers that have near-term demands, live projects, transformation programs in place. So there's certain skill sets to how do you ring-fence R&D to be run fast and develop the new, do co-development programs. There's a certain process that makes this work. And if you get this wrong, you don't get places. And I'm very comfortable with this space. Lastly, customer success and growth. I've always been fortunate to be part of a winning organization. For sure, that DNA is essential. And that -- bringing that DNA into Gentrack is part and parcel to just fundamental basics of leadership. I want to just take one more minute and talk about why Gentrack is attractive to me and I think a platform that should be attractive to everyone on the call. First of all, the industry has been through regulatory periods. It's been relatively static at certain points in its past. At this moment, the industry is at an amazing pace of change. The solar vehicles -- electric vehicles, solar panels, industry that's pumping energy back into the grid, we have prepaid plays, different regulation, frictionless changing of -- from 1 carrier to another carrier and customer experience. It's a super exciting place. And where you have a pace of change, you have a drive to modernize. The second reason Gentrack is a good platform is I think Gentrack has great customers. Gentrack has smaller innovators that can lean into and drive the agility that needs with new services and then larger Tier 1 players, okay? And these players, if you can be successful in the most dynamic countries where we operate worldwide, in my view, then you can be dynamic and successful elsewhere. So it's a good platform for that. 30 years of experience, it's hard to underscore enough how much. To be able to do business-to-consumer and business-to-business for our customers across water and energy is a significant accomplishment. There's not many companies in the world that can do it. We know how to do this well. We know how to deliver it. It's not a linear complexity when you move to multiplay. It's much, much harder to do these type of programs, and we understand what it takes to do it. The last thing, and then I'll hand over to James, is I think that -- and this is maybe where the green side of me will come out, but it's not -- it won't be the last time you hear it. I do believe that the world in which we live and our environment is fragile and sacrosanct. Energy and water are precious commodities. I think the world has woken up to the fact that they need to be cherished and looked after well. I do think there's a problem to fix, and technology will fix it. There's going to be great companies that tackle this problem and move us into the new era of clean tech, and I think Gentrack will be one of those. And I think that's an exciting role. That makes a lot of sense for us to focus on for customer service and beyond. So that's my view on Gentrack and my track record that I hope will bring to -- I'm confident we'll bring to bear. So with that in mind, I would like to turn over to James Spence, our CFO. James has been with us for the last -- with Gentrack for the last half year, and I think you'll see his involvement in the business to come through in the results. So James, please, let me hand over to you.

Thanks very much, Gary, and good morning, everyone. I will start on Slide 6 with financial headlines. The first thing to say is that while this is clearly not the set of financial results we would like, and the backdrop, as we all know, is challenging, there are some important positive trends in these results. I'll go into these as we go ahead through the update but would highlight 4 particular areas where good progress has been made this year. Firstly, cash generation of $12.2 million in the year and the year-end net cash position of $16.8 million is a very pleasing performance by the business and positions the business well going forward. Secondly, the cost run rate in the second half driven by actions taken from March onwards is moving in the right direction with further opportunities under review. Thirdly, the level of recurring revenues continues to grow, providing a level of stability to the business. And fourthly, despite the economic downturn in the aviation industry, our airports business remains profitable. So providing some more detail. You can see revenues down in FY '20 driven primarily by reductions in project nonrecurring revenues in both the utilities and airports segments, following project completions during FY '19 and delays to new projects in FY '20. Pleasingly, annual recurring revenues are up by 4.9%, although this was held back by supplier insolvencies and losses in the U.K. EBITDA is down, reflecting the lower revenues, although the H2 run rate of EBITDA of around $8 million has significantly improved on first half with the benefit of improved cost control. Statutory NPAT is a reported loss of $37.1 million driven by intangible asset write-downs, which I'll go into further on a later slide, that really reflect the uncertain economic environment our customers are now facing. I'll also talk about the drivers of our strong cash performance when I come to the balance sheet and cash slide later on. So moving now to Slide 7 where we see the group profit and loss. The key points to note on this slide relate to the segmental split where you can see the revenue reductions largely dropping through to the segment profitability. Pleasingly, airports remain profitable despite the significant challenges in the aviation industry, which have resulted in project delays. While on this slide also, you can see an increase to depreciation and amortization, primarily related to the adoption of IFRS 16, which impacts the accounting on our long-term leases, and also the low net finance expense, reflecting the group's net cash position. On the next 2 slides, we'll look at revenue by segment. So turning to Slide 8 where we analyze the utilities segment revenue. In the U.K., 3 large project implementations with revenues arising primarily in FY '19 were completed, resulting in lower revenues in FY '20. Positively, annual recurring revenues have improved in FY '20 from a mix of projects going live as well as underlying meet point growth in our existing customers. In Australia, revenue has been stable with drop-offs in project revenue following large implementations being replaced by revenues from ongoing customer relationships, particularly from projects to support complex regulatory changes. Overall in utilities, committed monthly recurring revenues have risen by 17.5% to $47.1 million, and overall annual recurring revenues are up 4.3% to $70.9 million, held back by supplier insolvencies and losses. The good news is we have continued our focus towards increasing recurring revenues during this past year, reflecting the customer relationships we have, the criticality of our software solutions to their operations and our ability to deliver the low cost to serve needed to compete in the retail market. Clearly, those existing and new customer relationships are key to our success. So our focus remains to provide the best possible experience and value for our customers in their challenging and transforming markets. So moving now to Slide 9 and on to airports. Revenues declined by 20% to $18.7 million, with the downturn in the aviation industry impacting project revenue due to delays. Despite a massive reduction in airport traffic and cost reduction programs across pretty much all airports, our airports business has remained profitable. Again, recurring revenues grew by 8.8%, reflecting the criticality of the Veovo systems and the benefit of post go-live recurring revenues from previous year projects. We provide an essential service to our customers, which has supported our revenue stream, but there have been delays on some projects as can be expected. Airports nonrecurring revenue reduced, reflecting key project deliveries in FY '19, including a major U.S. project with challenges in replacing that revenue in the COVID environment. Normal levels of customer activity have obviously been lower than the previous year, reflecting reduced levels of change, et cetera. Obviously, the outlook for this part of the business remains uncertain, although with opportunities as flying returns and as we look at alternative uses for our airports applications. Turning to Slide 10 where we look at FY '20 expenditure. After costs increased in the second half of FY '19 and into FY '20, steps have been taken from March 2020 onwards to reduce costs and conserve cash, which we see both the second half cost run rate and in cash generation. When you look at total costs, i.e. both OpEx and capitalized development costs, you can see that the second half FY '20 costs have reduced significantly illustrated by the circles showing level of capitalized costs and the half-on-half cost chart. A reduction in workforce occurred in March 2020, reducing headcount by around 65 FTE or around 13% of the workforce. Further cost reductions occurred in H2 related to COVID restrictions and other cost saving measures. Note also that the capitalized costs in FY '20 are minimal compared to FY '19 where capitalized costs primarily people-related were significantly higher at $5.1 million. We continue to focus on cost measures with various opportunities identified, while we will also have to add people-related costs in some parts of the business. Now moving to Slide 11 where we look at impairments and other write-downs taken in the year. Overall, our approach has been to be conservative in our forward view of asset values, reflecting the current level of uncertainty in the economy generally and for our customers. Write-downs totaled $34.5 million, including an impairment of $19.3 million taken against goodwill in our utilities segment based on uncertainty related to future cash flows. At the same time, we've taken a write-down of some previously capitalized software, reflecting a prudent view taken in relation to future benefits or where there's potential overlap with other assets. This is in addition to the previously communicated impairment of $10.7 million related to Blip taken at the half year. On Slide 12, you can see that cash generation in the business has been strong at $12.2 million, resulting in a year-end net cash position of $16.8 million, up from $4.6 million at the start of the year. You'll hear from Gary shortly about our focus to have a technology edge, and this level of liquidity, combined with the recurring revenues of the business, positions us to make those targeted technology investments. Cash flow has been driven by second half profitability and an exceptional working capital result with an improvement in net working capital of $14.7 million. Utilization of our $20 million banking facility, which runs to March 2022, has been modest in the year as you would expect with our net cash position. Now moving to Slide 13 on outlook. Our outlook remains unchanged from the announcement made on the 25th of September. We're not providing guidance for FY '21 at this stage. As you'd expect, Gary and I are working through plans for FY '21 and subsequent years with Gary only having been in place since 1st of October. As we said in September, the company continues to see market opportunities and will invest to provide market-leading solutions for our customers. We'll also continue to invest in new skills and the development of our people in line with our tech strategy. With upward pressure on costs as new skills are recruited and increased competitive intensity, it is expected that the EBITDA run rate for FY '21 will be below the run rate in the last half of FY '20. As already communicated, this may potentially reduce FY '21 profitability closer to breakeven, depending on levels of future product investment and other factors. Planning in relation to product investment strategy is ongoing, and a further update will be provided at the AGM in February. I'll now hand you back to Gary for a look at the future state of the business.

Thank you, James. So first of all, before we jump to this slide, I'd like to say that we are not comfortable with many of these trends and many of the negative ones will not continue. A lot of this is about leadership and winning, and so much of success and leadership is based on the leadership team. So I'd like to update you on some new developments. So you heard from James, I want to underscore, James has public company CFO experience. He is a seasoned veteran in the industry, understands the industry thoroughly. He knows many of the key players in the region, on the supplier side, and he is a transparent and professional CFO and a safer of hands. I'd like to introduce a couple of new names to this leadership team. I've been able to move very fast onboard on what I consider some exceptional talent. So I'm going to dip back to Amdocs just for a minute. Transformations and modernizations of service provider businesses are hard. They're very hard. As a matter of fact, they can be the success or failure of a CEO, for sure, a CIO, okay? And they last 10 to 15 years, the decision, and then it's implemented and the duration of staying with the supplier is a very long time. It's an amazingly challenging part of our industry. At Amdocs, we arguably did more transformations than the rest of the telco vendor industry combined. And if I -- my CEO -- my prior boss, if he could hear this, would probably laugh a little bit, but he'd probably acknowledge it that actually the hardest job in the company is running the delivery for these programs. So Zeev Berkowitz and Amdocs ran the delivery of 6,000 people and some of the most complex transformation programs on the planet, okay? Zeev has joined Gentrack as my Chief Operating Officer. In a COVID world, it's essential in a multijurisdictional business to have strong leadership in all regions. So Zeev is a New Zealand citizen. He's arrived in Auckland. He's going to be based out of New Zealand, James in Australia. So we have very strong -- and then I'm in London. So we have very strong people in all of our major operating centers, and this is essential, okay? Zeev has experience not only delivering, but building offshore development centers, managed operations, businesses, et cetera, okay, and knows how to develop a very high-performing organization. The next higher that I want to talk about is starting with us January 1 is Loukas Tzitzis. Loukas is a very capable CTO. I would prefer to call him a VP of Engineering because, to me, it's a more action-oriented set of deliverables title. Loukas understands cloud technologies. He understands how to leverage open source. He understands the security wrappers needed to be compliant with the industry. He understands how to build high-performance development organizations. These are very interesting character. He's a polyglot. I think he speaks 9 languages. I've known Loukas for several years, and I'm confident that the speed and innovation that he's going to bring to our customer base is going to be amazing. If you go to the next line down, you see my general managers that run the business in the region. These are not sales guys. They own the P&L. They own the success of the customer, okay, and the sales in the region, okay? So we have Allan, Mark and Paul in the various geographies. James Williamson is a seasoned professional that runs the Veovo business with his own management team and he's going to take advantage of a lot of things I'm going to talk about in due form, okay? And then as a people-centric organization, Melina leads our people experience. I want to quickly comment on the new Board dynamics, okay? Stewart Sherriff has joined the Board. For those of you from New Zealand, may know him from his role as CEO of 2degrees. We also have a new Chair, Andy Green, CBE, which -- both of them have enormous operational experience, global capability experience, understand the importance of servicing an industry professionally and are going to be a strong addition to the business. I would like to thank Nick, Fiona and Darc and the prior Board members for bringing me into this opportunity. And I thank the new Board for supporting me and onboarding this and what I view a super highly functional management team, okay? So I think that's just great news. Let's go to the next slide. I want to give a quick snapshot of our market in which we operate. I talked about how dynamic the energy market is. I would like to say that we do believe that our markets will shape global trends in which we operate and lead in many capacities. There are ongoing financial pressures in the U.K. on service providers. We would expect to see some more consolidation and potentially, and we hope not, but some more supplier administration actions, unfortunately, from the supplier failure. We do see increased competition in our space. In energy -- more on the energy side, we think that's good for the industry. It'll move us faster. We respect our competition, but we take them very seriously, and we know how to deal with them, okay? And we will take that in hand, and we'll play to win. On the water market, a little more static. I would say we have good water customers in Australia. We are the majority water supplier and contested water in the U.K. The water market will move off 20 to 30 old systems in the regulated side as pressure moves on to be more cost performant and provide better customer experiences. And as they do, we will be in a good position to capitalize on this. On the airports side, I think it's clear, you don't need to be far from any kind of newspaper to understand the state of the airport business. Revenues are down north of 80%. Passenger traffic is down. They're reprioritizing and focusing on essential services. The good news, as James mentioned, that our -- airport operational systems are deemed essential services, so we are in better shape than many of the players in this landscape. They have deprioritized and, to some regard, our passenger flow system's use cases, but they've entered new ones around COVID that we're pursuing. So that's the state of the main 3 markets in which we operate. If we go to the next slide, I'd like to talk a little bit about my aspirations for Gentrack. So I want to build a technology powerhouse, okay? We want to be in a position to be a strong and dependable partner to move the -- help the industry move to the cloud and to automate it from meter to cash, okay? A technology edge is essential for this. We know how to build it, and this is an aspiration. We want to be constantly innovating to lead the revolution to clean tech. I talked about the inference of this role in the industry. Constant innovation at scale is an exciting place to be, and we want to do this hand-in-hand with our customers. I believe in an accountability model in the B2B space where you build, deploy and operate your own solutions, okay, and do this as the world deregulates and transforms. This operating model of accountability works with the customer base in the B2B major software environment. Lastly, we will be a customer obsessive and people-centric organization. We put people in transparency and fair treatment at the heart of what we do with the CSR program and prior to technology and taking care of our customers and all stakeholders as well as shareholders. So this is my aspiration -- these are my aspirations for the company, and I look forward to working with the management team and all the passionate people in Gentrack with our customers to deploy this interaction. The last slide, and then we'll move over to Q&A. We are working on a strategy. I've been in the business for less than 2 months. We will come to you with the strategy in due course that we believe in. We want to take it -- we want to make sure we have the right strategy, okay? But that doesn't slow us down for focusing on priorities now. And I want to talk about the priorities that we've already implemented in the business, okay? They're very straightforward, okay? It's a return to growth. That's at the heart of our strategy. Now look, I've met several CEOs of our customers of major suppliers since I came into the business. I've done detailed account reviews on every single one of our projects, our customers. I've actually done several account reviews on a few of our customers. We are going to improve our customer service, and we're going to get our projects that are not in the profitability and the profitability for energy and water customers, okay? This is pretty straightforward, and this is underway. We are committed to maintain profitability in the airports space. And I believe that we will come out stronger at the end of this as a loyal and dependable supplier for the airports customers that we have now and in the future, okay? They'll see us that way. Innovation is key. I've talked about a lot. There's a lot of pressure to innovate. This is exciting. We have some new solutions that we've been developing, several that I've started to package together since I've joined. We are going to hit the street, I believe, in shoe leather sales and account-based marketing. We're going on a roadshow with these solutions starting next month -- starting next week to talk about these initiatives with our customers. The pipeline in winning new business. We have some interesting opportunities in play. We're going to play them to win. The pipeline is not broad enough that I would like it to be. We have work to do here. This will take time, but we will get there. We're starting to call on the major players also in the space because the big players are going to drive a lot of the industry forward and globally. I talked a lot about technology. We will accelerate our investment in our technology edge. This is critical in the cloud era and taking our customers on this journey with us. And while we define our long-time strategy, we're going to roll out these priorities. In closure, I would like to say I'm really excited to be here. I'm excited about the team and the people that I'm working with and our customers. And I look forward to this journey and being on it with you. So with that, I will turn it back over to Paulina and open for Q&A. Thank you very much.

[Operator Instructions] We'll take our first question will be from Phil Campbell with UBS.

Just a few questions from me. The first one was just on the write-down of the capitalized software. Just looking at the notes of the accounts, it looks as though the majority of the write-downs in relation to the U.K. and Australia. I did note that the U.K. was in relation to software that wasn't being used. I suppose the first question was just kind of like what happened to the other regions where the software was still being used, but you've written it down. So that was my first question. The second question was just I was keen to get Gary's view on -- a few weeks ago, we saw SAP had quite a big kind of profit warning or warning on guidance mainly related around its SaaS migration. I'm just kind of interested to see whether you'd seen that and whether you thought it might have any relevance to Gentrack. And then the third question was really just, again, just quite interested in Gary's views on -- if you were comparing Amdocs to Gentrack, what are the similarities for the transformation versus what are the differences for the transformation that may make it harder or easier?

Okay, James, do you want to take the first one?

Yes. Sure. Thanks. Look, we've looked at all our assets, as you'd expect, across the balance sheet and can see that, as you point out, the GB energy retail system and the Australian water retail system there have been write-downs. And what we do is, as you'd expect, we look at the future revenue streams from these assets, compare them to the asset value and adjust correspondingly, if necessary, which is what we've done here. I don't think you should be reading into that anything other than those specific assets. There are potential overlaps or we've looked at the revenue stream. And because of the uncertainty, we've had to make adjustments there. It's really that straightforward. It's not that there's a bias to one market or another there.

Okay. Great. So Phil, I'll answer the SaaS question. SaaS is tricky. It's actually in a B2B space. It's actually interesting. You have to be careful not to turn analog dollars in the digital sense with the wrong SaaS deployment. I actually think that when developing technology to get the core right that SaaS but then to be able to provide customization around the core that's charged, that's unique, it is an important element. Monetization of this and this kind of software and service business model is a -- is an art, I would say, for sure. We have experience here, and we're building some of our new stuff, specifically with this in mind. But it is a space to watch. I would also say back to the accountability model, the more and more we move to the world -- when I say we, I mean the world moves to agile development in the B2B space, when you write your own software and then you deliver your own software, it just -- because you're delivering in every 2 weeks in sprints and things like that, you just have an inherent advantage rather than having somebody else in between you. Maybe in the customer in certain circumstances or if you're working with an SI, you need to do it in the right environment. So these are all things that we're looking at that are an important part of the SaaS journey. But yes, a lot of companies trip on this area, and they need to be careful about it. An answer to your question about the type of transformations between Amdocs, the telco space and the utility space. Look, I think that at Amdocs, we did large transformations, and we did small ones. It's the same here. I would say the scale is a little bit smaller in terms of customer numbers a lot of times, but not always. The other thing is the real-time nature of telco is more advanced, although we're seeing more and more prepaid. So that's an element. Service providers should not underestimate the complexity of this journey. It is difficult to get customers through the safe harbor. But Zeev and I have a lot of scars from doing this. We understand how to do it. I think our success rate is where -- Amdocs success rate is phenomenal, and we're going to bring that with us. And so the transformations are very similar, in my opinion, very similar. Controlling scope, managing the customer, managing the whole program, the migration, there's lots of places to get it right or get it wrong. And I think these similarities are super, super close, actually, onshore, offshore, mixed, et cetera.

[Operator Instructions] As we have no questions in our phone queue at this time, I'll turn it to Aaron for any questions through the platform.

Thank you, Paulina. Just the one question from [ Peter Cavalier ]. "How has COVID-19 and the ability to travel affected the management of our multinational company?"

I can take that probably, James. It's affected our ability to travel that for sure. Somebody was asking me if I have any regrets at this point coming into the new business and one is to not be able to easily get to New Zealand and Australia. I think I mentioned it earlier. One thing that we've learned in this COVID period where you have decent-sized operations in different geographies, you really need to have strong management in those locations. We have Zeev in New Zealand and Allan there and Melina. We have James and Mark in Australia. Myself and Paul and Loukas in the U.K. It means we're working hours that are not always the most comfortable, but we have an open dialogue, and we're all hard workers. So I think we've been able to manage it well. But yes, there's -- it's not the same as it was, as we all know, but I think we have this in good hands.

Thanks, Gary. So no further questions. And I'll hand it back to Paulina.

Okay. Looks like we have a question in our queue. We'll move to that from Phil Campbell with UBS.

Yes. It's Phil Campbell from UBS. Just a quick follow-up one. Just in terms of the outlook comment, James, it talked about obviously, the FY '21 run rate of EBITDA being lower than the second half of FY '20. And it talked about kind of product investment costs and other factors. I was just wondering if you can give us a little bit more color about what the other factors were relating to.

So honestly, it's -- I mean, the world we're in, obviously, there are a lot of moving parts. As you'd expect, you've heard us talk about how our customers are facing uncertainties. I mean, clearly, what is really, I think, positive in these results is the recurring revenues, which have proved robust, and we've seen an increase despite pressures in the U.K. in our recurring revenues of 4.9% overall across the business, which, given the backdrop, is positive. Clearly, we'd like to be higher than that. But when I talk about other factors -- when we talk about other factors, I should say, really referring to the overall level of uncertainty that exists at the moment, I don't think I'll be more specific than that. When I look at -- there are, obviously, as you'd expect, a variety of factors here. You'll understand that we're reluctant to give guidance at the moment. I think that's common to many players in the market at the moment, but you can see that the -- we've got decisions to take. Gary has joined recently. We're reviewing our strategy at the moment. We'll define that and bring it back when we're ready, and that will help define some of our key decisions around FY '21 expenditures.

Right. Would we expect headcount to go up a little bit in FY '21?