Gentrack Group Limited (GTK) Earnings Call Transcript & Summary

Good day and welcome to the Gentrack Half-Year Results Announcement 2023 Conference Call. Today's conference is being recorded. At this time. I would like to turn the conference over to Mr. Gary Miles, CEO. Please go ahead, sir.

Thank you, Jessie. Hello, everyone. This is Gary Miles here, Chief Executive of Gentrack. We're here for our FY '23 half year update. I am actually in Australia and Melbourne right now, long a tour of New Zealand Australia where I've been fortunate to meet a bunch of the CEOs that actually run the industry down here. It's been super exciting to hear what's going on, managed to get to the MCG and see some Aussie football on the weekend, which was also quite fun. But let's get to business and the results. So I'm pleased with the results. I think the teams are really performing well. It comes through in the numbers. So revenue was up 47.7% for the Group. Utilities revenue up $51.2 million to $73.9 million. I'd like to say that the underlying revenue, if you exclude insolvencies in the B2C business in the U.K. from customer insolvencies, the underlying revenue is 39%. I do want to make it clear that I think the revenues that we've benefited from, from insolvencies in the current year will not be with us next year, but also the kind of saga of insolvencies that has been with the company for several years on the B2C side in the U.K., I think, is also behind the business. So that's -- we see that as a very positive thing. The Veovo revenues are also up strongly from to 26.7%, and we'll talk more about that when we come to the details. On the profit and EBITDA and cash side, the business is cash generative, we posted a strong profit. I'm pretty pleased about the results really to be able to collect cash is a sign that we are delivering well and running a tight ship. And I'm pretty -- we're comfortable with the situation on our balance sheet. No debt. We're in an industry that's an essential service, so a lot of talk about inflation and potential recessions. And the last time I checked, people need water and energy. So we feel pretty pleased about the markets in which we're operating, and I'm not going to talk about more of the details of the results, I'll leave those to John. If we go to the next slide, I'm going to read our updated outlook. So for FY '23, the Group expects revenue to be between 157 and $160 million. This is an increase over previous guidance of $147 million to $150 million. We still expect FY '23 revenue will include $25 million from insolvent U.K. B2C customers, with a higher revenue guidance a result of faster growth across the rest of our business. We are putting a forecast out for EBITDA for FY '23 to be approximately $22 million. The strong underlying growth in both utilities and Veovo airports business, means that we are able to upgrade our revenue guidance for FY '24 from the prior guidance of $150 million to be in line with FY '23 revenues. This is despite the loss of one-off revenues of approximately $25 million from insolvent U.K. customers. Our targeted EBITDA margin for FY '24 remains unchanged at 12% to 17%. We are not rebaselining our growth beyond FY '24, which is in high teens growth for the utility business and 15% CAGR over the extended period for the airports business. So to go to the next slide, this is an exciting time to be in both airports and utilities, and we'll talk about airports in a minute. On the utility side, I am increasingly amazed and energized by the opportunity, quite frankly. The industry is -- needs to rebuild almost all of its fundamentals, and it is a huge industry. And I just really couldn't think of a more exciting place to be, and our drive is to make a positive impact to try to reduce carbon, make the industry run more effectively and modernize it. We've got some statistics here. It's maybe not 100% north of 90% of utilities will upgrade their bidding system in the decade. We believe a few players will dominate this change. We plan to be one of them. No industry has seen so little IT change in the past 25 years, and now needs to change so much to modernize and deliver towards a sustainable future, decarbonization, decentralization and all the impacts that are associated from it. And this is our purpose, and we're pretty keen on how we're headed this direction. If we go to the next slide, I want to talk about our stakeholders. So let's start with our customers. So I've said repeatedly, that we've got some really innovative smaller customers. I think all of our customers are innovative and increasingly so, but our objective is to service the leaders in the market, Tier 1s and Tier 2s. We have some really good Blue-Chip brands here. We're moving up the stack to do this more and more. We build hyperscale solutions that are very reliable, that can run a large, large enterprise. And these are the conversations that we're having, as we move into this segment, we do this really well in many customers today, and we'd like to do it with more. And so I want to thank our customers for their partnership. On our people, the leadership team is doing well. I think we have a world-class leadership team. I want to thank my team for all of its dedication and hard work and professionalism. This change in our growth gives our people career opportunities to move, to do new things, to learn new things. Our attrition is actually significantly below the global IT tech benchmark, which means people are energized by their work and the purpose, and we're growing. We're looking for good people that want to make a change and want to help us on this exciting journey. And then lastly, over to the investors. So I want to thank our longstanding support of investors, and we've got several new investors on our register. Welcome! We look forward to a long and fruitful journey together, and the results are strong, and we're pleased that we're able to bring good results to all of you guys out on the line. Let's go to the next slide. I'm a big believer in setting goals and judging performance against them. This slide is a recap of what we told all of you in November of FY '22, on the back of our FY '22 results. So I want to go to a scorecard, because that's the way we run our shop. We're going to talk about growth in our core markets and what we've done and our global expansion. So if you go to the scorecard for growth in our core markets, the numbers speak for themselves. In each of our operating theaters, these are our main core operating theaters. We work in 6 countries today. We have very strong general managers and they play to win, they're service-centric, they build good relations with our customers. They're selling well. I couldn't be more pleased with the performance. John is going to talk about these numbers later, you can see Australia is up 26%. New Zealand up 58%, U.K. up 59%, he'll show some numbers that has a different growth rate for the U.K. in the back half of the deck, which is exclusive for insolvency, so there's not any misunderstandings, but well done to the teams really in the field. And this is basically just doing more and more with our existing customers and winning new customers. On the g2.0 front, our technology is resonating very well. It was a brilliant move to partner with AWS and Salesforce. I feel really good about it. I just want to explain in this graph, which is a little bit without some specific timelines, but it's to show our general strategy. So the blue line is new sales, all new sales are being sold as g2.0. The green line is to upgrade our base, and we've got a lot of experience on how to upgrade a base to new technology stacks. And what we're going to do is, we're going to deploy it in a couple of customers. We're going to harden g2.0. We're going to automate the transition from our prior technologies to g2.0, how to roll that out to our customer base, and then there'll be a bow wave of change as we move all of our customers into the new stack and a much more kind of profitable and secure way. So that's the cadence in which we're rolling out g2.0. We've got some new wins we've put on the board. Some of them are here, some of them are not here that we haven't announced yet. I just want to reiterate that our focus is Tier 1 and Tier 2 customers. We do support B2C and B2B, which many of our competitors do not support both segments. We also support water and energy. We're pretty keen on the water market, it represents a decent chunk of our revenues today. The water market also has to transform. Maybe the triggers to make it transform are different, but it also has been very underinvested in, and the cloud exists and it's time to move. So these systems that are leaking creaking are starting to be modernized, which is great. Now if we talk about international expansion, we did not forecast results in the 6-month period for our international growth. We stepped out. We said we would go into EMEA and Asia. We made that announcement in November. Since then, we've opened our Singapore office. We've spun up our teams. We've put a lot of good and strong people on the ground. We're selling with our partners, Salesforce and AWS and TCS and others. I am very pleased with the progress. The pipeline is impressive. It's expanding. Our name is getting out there, but sales cycles take time. So it's early doors to see the conversion rate. So really good execution on here, and I think the thesis of this slide is watch this space. If we move to the last slide of my opening, let's just talk about the Airports business. So First of all, during the pandemic and for those of you that were with us on prior calls, we invested during the pandemic when the airports industry was kind of put on ice a bit, so to speak. We invested in machine learning, cloud technologies. We were confident the airport industry would turn back around. It was just a matter of timing. We made the right decision. Our technology is resonating well. I think we're in a position where our technology is innovating, setting that pace for innovation for this market. And there was a push right up -- starting right before the pandemic to digitize Airports, Airports 4.0. It was put on hold for several years. The pent-up demand is unleashing. Our pipeline has more than doubled. But once again, like the international business and utilities, it's a little bit early doors, because these sales cycles take some time, since the airport has turned back on their buying cycle. But we think we're well positioned here, and we're excited about -- James Williamson, who runs this business for us, told me that in 25 years of airports, he has not seen the pace of demand for [indiscernible] at this level. So I think that puts us in a good future position to play on the strengths of our strong growth that we have today. With that in mind, and as a summary, I'm going to hand over to our Chief Financial Officer, John Priggen, to go into more of the details that I'm sure all of you guys would like to hear about.

Thank you, Gary. So first of all, if we look at the Group results, our total revenue is up by almost 48% compared to the prior period. So that's strong growth at both the utilities and the Veovo businesses. Our revenue in this half does include $19.7 million from Bulb and other U.K. insolvencies. But if we put that to one side, we can see that the underlying growth is impressive. So our utilities growth, the underlying growth there was 39%. Our costs are 22% higher compared to the prior period. Now that's to both support the revenue growth, but it's also as we continue to invest in strategic R&D and our sales engine. If you put the 2 of those together, the EBITDA was $16 million in the first half of the year. So that's $14.8 million more than the prior period. And in the first half, we have benefited from those high levels of revenue from Bulb. For the second half of the year, we see those revenues impede, so we're expecting far less revenue from Bulb and other insolvencies. And accordingly, our guidance for the second half EBITDA is to be around $6 million or so. So if you look at the utilities revenue, in terms of the bar chart that you'll see in the presentation, what we're showing here are the different recurring revenue streams and our nonrecurring revenue streams for this half year compared to the prior half year. But what we've done is we've separated out -- as we've done in previous presentations, we separated out the revenue that we received from Bulb and other insolvent U.K. customers, so that you can clearly see the underlying revenue of the Utilities business. That underlying revenue has grown by 39% and actually, the recurring revenues, the underlying recurring revenues have grown by 43%. Now that growth has come from delivering on recent customer wins, both wins from last year and also from this, as well as selling more to our existing customer base. In the second half of the year, we're expecting to book around about $5 million or so of revenue from Bulb and customer insolvency. So that will take us to $25 million in total for the financial -- for the full financial year. So that's in line with the guidance that we gave from that revenue source back in February at the time of our Annual Shareholders Meeting. As we look forward to financial year '24, we're assuming that there's no revenue from Bulb or customers in insolvency, so that will all close out by the end of this financial year. So if we look a little further at the underlying revenue for the Utilities business, the key point here is that, that strong growth across all of our regions. So strong growth in the U.K., in Australia, in New Zealand, and for the first time, we're separating out the rest of the world in our presentations, so that you can see how we're growing our international footprint outside of our core markets. In the half year, we booked $2 million of revenue, mainly from customers in Singapore, but also from customers in Fiji and Papua New Guinea. And that's growth from across both the energy and water markets. If we look at the utilities cost base, in the presentation, the graph shows how we move from our cost base in the first half of last year to our current cost base. And what we can see, is that we've increased the spend on direct costs by about $6 million or so, people and hosting costs, and that's to support our higher revenues. Now our revenues have grown at a higher percentage, so we've benefited in the period from operating leverage. We're also investing more in strategic R&D. So that's grown by $1.4 million compared to the prior period, and that spend will increase as our underlying revenue growth. Now for the first time, we have spent on sales and marketing and business development outside of our core markets. We spent $1.4 million in the half year to expand across into Asia and Europe and in the Middle East, and that's in line with the $3 million per annum target that we set out last November during our earnings release. Outside of those new markets, we've continued to invest and increase that investment in sales and marketing within our core markets. We're spending $2 million more on that than we did in the first half of last year. Turning to the Veovo. So our revenues here have grown really strongly as well. In total, they're up by around 27% compared to the prior period. That's both our recurring and our nonrecurring revenues. So our recurring revenues are up by around 15% compared to the prior period. In fact, our recurring revenues have grown year-on-year across the last few years, all throughout the pandemic and the recession that the airports industry saw, our recurring revenues have continued to grow. And that's what we're seeing, and we see that continue to grow here as well. Our nonrecurring revenues have seen strong demand for upgrades and transformations from our existing customer base. And in turn, that will increase the level of recurring revenue in future periods. So overall, a very good set of results for Veovo. So what does that mean for our cash flow? Our cash at the end of March was $41.9 million. Now we don't carry any debt on our balance sheet, so that's our net cash position. We have a very high conversion rate from EBITDA across into our cash flow. So we haven't capitalized any research and development in the half year. Instead, that's all expensed and is already included in our EBITDA. Now we have benefited in the half year from some tax overpaid in the last financial year, always comes through with a bit of a lag. So we benefited from that in the first couple of months of this year. But behind that, our cash collections have also been very strong. It reflects good project execution, as well as good customer management and engagement. So overall, the cash flow in the first half demonstrates a very strong performance of the Gentrack business, demonstrating how our business model is a cash generative business model. So I'm going to hand back across to Gary, who will give a few closing remarks.

Yes. So in summary, we're pleased with the progress in our core markets and the work that the teams are doing. For the new markets we're entering, for both utilities and airports, our pipeline is growing. Our technology -- we're a technology-first company. We believe the best technology wins. We're investing heavily here. It's resonating well. Our partnerships make sense for the market and for us. Our people are engaged with the program. You can imagine this type of growth, with the various strains on the company, and I want to thank the individuals for their -- really stepping up and just above and beyond. And then once again, we want to welcome the new customer -- investors to the register and thank those that have been with us, supporting us, and we look forward to seeing many of you over the next few days. And I think with that, we're going to move to a Q&A.

[Operator Instructions] And Guy, Your line is open. First question is coming from Guy Hooper with Jarden. Your line is open. Joshua Dale, Your line is open.

I think we may have -- there may be a technical problem with the system, because it sounds like people are trying to get in and can't. Should we move to the online questions and ask people to put their questions into the system or give it another go?

Yes, they can get it into the system. Let me see the other person -- if they can be here, one moment. [ Colin ], Your line is open.

Congratulations on a strong result. I guess as the first question for me, can you give us a bit of a sense of what the underlying margin was for the business during the half?

Yes. Look, we've deliberately not tried to sort of split out the profit that we get from effectively Bulb, and the profit we get from the rest of our business, a couple of reasons. We can't really single out and disclose the customer profitability of a large customer. And the other reason is that in practice, it's quite difficult to differentiate between the impact that you have from operating leverage. So the fact that our revenue has grown very strongly in the first half of the year, whilst our overhead base, our shared costs, et cetera, hasn't grown by so far -- for that operating leverage and actually some margin from individual customer contributions. So we haven't separated it out. And I'm not really sure it's quite practical.

Yes. No, that's fair enough. And just in terms of the guidance upgrade, I mean the additional $2 million into 2023, I mean, what's driven that? Is that contract wins coming through, I guess, in the first half, expected to contribute in the second half, or does it sort of just reflect confidence that you've got on execution on the pipeline in the second half?

It's both. It's new wins and it's just doing more with our existing customers.

Yes. There's not a single event. It's quite widely spread.

Okay. And then I guess just one last one for me then, can you give us any color in terms of -- or further color in terms of pipeline growth? Like, is that driven by a particular region? And then just, I guess a follow-up to that -- in terms of the customer conversations you're having in South Asia and Europe, what type of discussions are those in terms of potential customer size or the types of opportunities? Is it the introduction with those customers by specific product, or potential for the full business?

Yes. So the progress that we've got in both EMEA and Asia is across several countries. We're not going to get into details, because we don't need to point our competitors in that direction, which is good that we've got a dialogue with -- kind of in many utilities. For the vast majority of the time, it's to modernize their entire stack. Now there's different ways to skin that. You can start in many different ways to do that, but it's a full transformation, that's the business we're in. And in terms of size, as I mentioned, we're targeting the Tier 1s and Tier 2s that [ meet ] the industry.

And next question is coming from Joshua Dale with Craigs Investment Partners.

That's brilliant. Just first question, you have $42 million of net cash. You're not paying a dividend, you don't capitalize R&D. It feels like free cash generation will be strong over the next year or 2, and you've already provided expense guidance implicitly. It feels like the only reason you could be building up your cash balance is for M&A purposes. Is that correct?

Well, I think, certainly, we -- I think it's broader than that. I think we see very good opportunities for growth in both businesses, Veovo and in Utilities. For us, it's very early days to be talking about M&A activity. It's also quite early in terms of us expanding internationally. We only announced that at the November earnings release, and we started execution on that for the last 6 months. So I think we just want to make sure that we've got the resources behind us, to fully execute against all of that. So a combination of potential M&A and potential just wider growth.