Gentrack Group Limited (GTK) Earnings Call Transcript & Summary

Hi, everyone, and this is Gary Miles, CEO of Gentrack. Welcome to our Half Year '24 results. Let's jump into it. There will be time for questions, obviously, at the end. I always try to start the call with a little bit of perspective. I spent the weekend and we're in Auckland now, and I spent the weekend in Auckland, and this is a great photo. I went on a bike ride with these 2 gentlemen yesterday, pretty long one from Auckland around Devonport. I think, around the harbor. They're a little too fit for me. But the one in back is the Account Manager for Wellington Airport and many other airports and the one upfront is our General Manager. And what's a great story about this, we just signed this upgrade at Wellington. You know, we service Christchurch and Auckland also here in New Zealand. Dave, our General Manager, his father, was actually involved in building that airport. So there's just -- and there is ton of pride going on in the Veovo Group and lots of activity, and I want to appreciate the hospitality that New Zealand has given us on this visit. So if we move on to the results, the results are good. I'm very pleased with the performance of the team. We had revenue of $102 million. You can see the headline numbers here. I'm not going to focus a lot on that, 21% growth. The 21% growth is pretty remarkable and the fact that we had $19.7 million come out of insolvent customers in the U.K., the last of which went insolvent in FY '22. So we foresee that storm being well behind the business. The Veovo business performed exceptionally well, close to 50% revenue to growth. We said in prior reviews that the Veovo pipeline looks strong, and we were confident in the pipeline, and I think it's showing through. There is some hardware in that number at $3.8 million that's exceptional. So we want to count that out, pull that out specifically. And then EBITDA is up. And what's important about EBITDA because this is a really important number that it's not so easy to see through. But the $19.7 million that we had in the prior period was very high-margin revenue. So this underlying revenue performance is -- really shows through that we're moving the revenue -- the EBITDA needle in the right direction. And then you can see the cash results. And just to remind the audience that we put approximately NZD 13 million into Amber Electric in the period. So once again, good results, yes. So let's press on, John will go through in more detail. We have an upgrade on both revenue and EBITDA. I'm going to read it here. Both utilities and Veovo continue to grow strongly, as a result of recent wins and customer upgrades. And so, we were able to upgrade our previous revenue guidance of at least $170 million for FY '24 to a new guidance of circa $200 million for the year. Against this higher revenue guidance and whilst continuing to invest in strategic R&D and international expansion. EBITDA is expected to be between $23.5 million and $26.5 million. This compares to our previous guidance between $20.5 million and $25.5 million. Now if we move into some of the details, we've talked about the utilities business as being a 4 plus 1 growth engine. So as you know, we're in 7 countries today. Our large countries are New Zealand, Australia and the U.K. for the utilities perspective. New Zealand is growing at 81% on the back of new wins here and a strong customer book. Australia continues to grow in the [ mid-20s ]. This has been very consistent, and we see this to continue for quite some time. New Zealand, by the way, will -- has a big book of business in front of us with contracts already won. The U.K. actually shrank in the period, but that a $19.7 million came out of the U.K. So the underlying growth was higher at 62%. Those growth engines and then you add Veovo to it, approximately 49% or 50% in the period have allowed us to put these results forward. What we do say though is that we have international ambitions to lead the energy and water transition globally. We've entered the Australia -- sorry, the Asia Pacific market and the Europe and the Middle East. We'll talk more about the pipeline coming up. But the international business grew to NZD 8 million, but that's where obviously the large long-term potential is, and that's the way we are thinking about our business is performing in the core and then to continue to target this international opportunity, as the energy markets and water markets transform. So let's go to the next slide, a little more detail on that. The pipeline across Southeast Asia is looking promising. The interesting aspect about Southeast Asian utilities is most of them are national or pseudo national carriers or they are national carriers that are broken into several regional players, but big books of business, very large meter [ point counts ] and long sales cycles. So we are in the fight in several countries in Southeast Asia, and that continues to progress, but will take time. Across Europe and the Middle East, we have that Saudi win. We opened our Saudi HQ for the Middle East. On the back of that very [ greeny ] clean project, [ NEOM ] is a kind of reference for the region, as the region tries to transform in the Middle East. And then we have a growing team of investments across Europe, as we make headway into that area. In Australia and New Zealand, we've talked a bit about them. I would like to say that here in New Zealand, we're up for the high-tech Company of the Year finalist, which has been decided on Friday. We would love to win that. That would be fun. We do play to win, but we'll see how that plays out. It's an exciting little bit of news. On the technology front, we called it with G2. We made the right decision to embrace Salesforce inside the industry has a problem and that it keeps paying to integrate a CRM on top of a biller that's a waste of money and we've done it in an R&D organization. It just makes a ton of sense. And I can say that I am super encouraged with the strategic direction that we've taken the product. It really, really, really, really makes sense. And the demonstration and the capabilities that we can do with this are pretty wow-ish. Some of you may have seen it. We've got Mark Rees, who's joined us in the period, is ex CTO of Xero, that's come across and is I think is starting to accelerate a lot of things there, which is also great. And so, we're happy with the technology path that we're on and that we've chosen. Just a few words about Amber, and we won't report on this every reporting period. But since we closed in the period, we wanted to highlight it that the migration for the Amber billing system to our stack is underway. Amber is meeting all of its objectives financially that they set as part of that acquisition. We're really pleased with that. I can say that we've started the road show. As a matter of fact, they were here in New Zealand, meeting several of the retailers last week with me and some of the other leadership here in town, and then they were across Europe and the interest is exceptional. So we look forward to, I think, good news on that front over time. Right. So let's move to the next slide, if we may. The Veovo's airports division takes off. This is our marketing -- our finance organization, getting cute with plano words, but it is fitting. So we had some good wins in the period around the Manchester Airport Group, Stansted, the Middle Eastern Airport Group. But I just want to say something. Our move into Tier 1s is paying off. It's just fantastic. We're super excited about the opportunity. The team is performing well. We're scaling and we're moving into Tier 1s. And you know what, our brand and our [ management go ] to shows and our brands, our stand is overrun, it's in good shape. Now we have a lot of work to do and juggling to undergo like any high-growth business, but we made the right call to invest during the pandemic, and it's paying off, as you can see in the numbers. So I want to thank the airports team in particular. If we go to the next slide, so we've talked a lot about our purpose to help make the world a more sustainable place for all of us. We'd like to lead in that -- our part of that journey. We have a lot of employees that are gravitate towards that value proposition. We have a strong global sustainability task force that's distributed. We've got lots of programs in place. We're starting into the budget cycle for where we're going to invest in our technology next year and its key metrics to invest in certain technology that help accelerate the green transition and we call those out. So I'm just putting it here because it is an important part of our business. We really, really walk -- walk the talk. And I think a lot of the investor community is also interested in this subject. And for sure, this is something that we're really, really, really passionate about. And we have a Chief Sustainability Officer that's running all these initiatives, so it doesn't get deprioritized with all the kind of urgencies of the day. So I think we're doing the right things here, and we'll continue to do more. The next slide, which is my closing remarks, I'm going to try it. It's a little bit worthy, so it skews that, but maybe some people would appreciate it. So both of the industries in which we operate, airports and utilities are undergoing major transformations. I've said it before, you cannot create waves in the ocean, but you can ride them. This is -- these industries are great industries to be at, great industries. And yes, the -- that makes us confident about our ambition, which is to provide greater than 15% CAGR over the medium term, which comes hand-in-hand with leading this transition, which is our ambition. Our core markets are modernizing in advance to most customers. What that means is Australia and the U.K., New Zealand are really, really kind of living in the future in many ways compared to where some other countries are going. So those countries when they set their green targets, they look to these territories, to learn from them and they look to leaders that are leading in them. And so, we host a lot of delegations from overseas to come to the -- talk to our customers in these countries that it helps. So that base here will -- I think it validates the scale of change that other countries will need to undergo. That's important, particularly if you're a macro investor. In Europe, the Middle East and Asia Pacific, our pipeline is strengthening and maturing. We've had some early success, but sales cycles take time. So I put in here very clearly, we do not expect to have a material contract signed until FY '25. But it's a numbers game and having a sense of sales and closure rates and where you are in the discussion, and we're in a lot of good discussions, which is excellent, but it takes time. For Veovo, our focus on major airports is paying off. I spoke about this. So I think we're well placed to win and serve. So confident there. We will assess M&A opportunities they arise. And in closure, I would like to say that our register is getting broader. As at the end of April 30th, we had 69% institutional investors. We want to thank all of the community that's helping us on this journey and participating in it. It's an exciting one. And we're looking forward to [ continuing ] to bring good, strong results. And with that, I would like to hand over to our Chief Financial Officer, John Priggen, to go into more of the numbers beyond.

Thank you, Gary. So looking first at the group's P&L, you can see there that revenue is up 21%, and that's strong growth at both Veovo and utilities businesses. Our operating costs are up by 31%. So that's both to support that growth, but we're also investing more in strategic R&D and in business development to drive that international expansion. A little bit more of that later. And then just to call out a note here that the Veovo's costs in half year '24 include a higher amount of hardware costs than they would typically do in the prior period. And again, that's just to support the mix of revenue we see in the first half of this year for Veovo. Our EBITDA is at $12.3 million. So we previously signposted the prior period included one-off profits from insolvent customers. So that $19.7 million of revenue from Bulb and from others was actually quite high margin revenue. In terms of our investment in Amber, so we account for that as an associate. And what that means is that we book our share, so 10% of its results since the date of our investment. So since the 1st of February, and we show that in our P&L below EBITDA. So for the first half of this financial year, that includes Amber's February and March results. And those are in line with what we were expecting. So looking at the utilities revenue. As in previous presentations, we've shown separately the revenue from Bulb and other U.K. insolvent customers. That's the move that you see in the diagram, so the $19.7 million. And those customers fully exited by the end of last financial year, so you don't see any of that rolling forward into the current financial year. That means that it's really strong underlying growth, up over 60% compared to the prior period. Now we have high levels of non-recurring revenue, so project revenues in the first half of financial year '24. We called out some of the major projects that have started in the period. So we called out the Saudi Arabian win, the GT transformation at Genesis Energy. But really, that's a minority of that number. So that $28.9 million that you see for non-recurring revenue in the first half of financial year '24, that's actually spread across quite a wide range, quite a number of our large customers, and it's spread across all of our regions, quite a diverse and broad revenue mix there. In terms of our recurring revenue, so that's increased by 49% over the first half of last year. So that's the CMRR and TRR that you see in the chart. And that's really from wins and upsells from the prior period flowing through, first of all, actually into the second half of last year, we saw an uplift over the first half within last financial year. And then again, flowing through and uplifting into the first half of this financial year. Looking a little further at the utilities revenue mix, we show here the revenue by region. So U.K.'s total revenue has fallen by 5%. So that's impact of losing Bulb in the prior period. You can see that without that, underlying revenue growth in the U.K. is actually very strong up by 62%. In fact, it's strong underlying growth across all of the regions in the Utilities business. The rest of world here in half year '24, that now includes revenue from our contract in Saudi Arabia. So that's adding a new country to Singapore, Fiji and Papua New Guinea that was there in the comparative period as well. Now we always show here our revenue -- our customer concentration in terms of the contribution of the top 10 customers. It's typically a little north of 50%. So in the sort of low 50% mark, low [ 50s ]. It's moved up to 61%, and that's really the impact you see of quite a high level of project revenue coming across that top 10 customer list. Turning to the Utilities cost base, you can see the $10 million increase in our direct costs, so that's the people costs, the hosting, those direct customer related costs, and that's to support the higher revenues. But I always want to call out here, the step-up in the higher level of investment in strategic R&D, that's increased by $3.2 million compared to last half year. We continue to expense all of our R&D in the year. And we've also actually a little more than doubled our investment in business development in international expansion. So that's in opening up the fronts in Asia and Europe and the Middle East. So that's gone up by $1.6 million over the prior period. And our spend in the first half of financial year '24 was $3 million. So the message here actually is that we're taking some of the margin from the higher revenue we're now seeing in financial year '24, and we're reinvesting that into future growth. Looking at the Veovo business, so you can see here, the revenue is up by 49%, and that's driven by those new customer wins, particularly in the U.K. and the Middle East. So Manchester Airport, London Stansted, very large airports in the U.K. and in Dubai and Saudi Arabia in the Middle East. So that's leading to a high level of non-recurring revenue of implementation revenues, which is $7.6 million is more than double the prior period. And as Gary referred to earlier, that includes $3.8 million of revenue from the sale of hardware and related services that we source from our supply networks that's bundled up in the implementation, the project fees that we charge to the end customer. And the reason that we note though is that, that type of revenue and the cost related to it can be quite lumpy between half and even between financial periods. In terms of our recurring revenue, that continues to grow well, [ was ] up by 16% compared to the prior period. So that's the wins, the upgrades from prior periods from last year in particular, flowing through into recurring revenue in this half year. So lastly, looking at the Group's cash flow. Cash at the end of March was $39.3 million. We continue to be debt-free. We do retain an undrawn $25 million credit facility undrawn, which we've had for a little while now. Our underlying cash that we generated in the period was $3 million and that was before investing $12.9 million in Amber in February. So our Amber investment was partly funded by cash generated in the period and partly by cash that we held on the balance sheet at the end of last financial year. And what we do here is we then give a flavor of what we're expecting for the full year to see in terms of [ from ] those key cash flow movements. We're expecting that the working capital outflow that you see here for the full year, we'd expect that to materially narrow. So we've got an outflow in the first half. We'd see an inflow in the second half for working capital. In terms of the other main line items, so in terms of amounts we pay for tax, for CapEx in respect to property leases, and in respect of the add back to EBITDA for the accounting for our LTI scheme. So that's a non-cash item that's included with EBITDA, so to get the cash, [ you ] add it back. When we look at the aggregate of those, we're expecting that to be at a similar level in the second half of the year to what you see here in the first half of the year. So that brings me to the end of the slides that I wanted to present on this call. Just to note there are a couple of additional pieces of information in the presentation. So there's a slide that shows how the way we describe revenue in the presentation in terms of non-recurring revenue, CMRR, TRR, et cetera, the way that, that then reconciles to the way that we disclose it in the interim accounts. And there's also a slide that looks at the impact the currencies have had on our results in the 2 half years. So with that, we're now ready for questions. [Operator Instructions]

And your first question on the phone comes from the line of Joshua Dale from Craigs Investment Partners.

Good morning, Gary, good morning, John. Congratulations on a very strong result. Just my first question is on the pipeline for G2. It sounds like it's healthy. But how many in that pipeline sort of waiting for a proof point of a smooth migration? Is there an element of that perhaps waiting for the outcome of the Genesis transformation?

Josh, thanks for the question. Look, we -- a lot of G2 is also in modules that are -- we've been adding to our core stack for the last 2 years -- 2.5 years. So that like our data analytics is installed in 15 to 20 customers, our meter data services and things like that, some of the sales force integration. So it's not really so binary. Having said that, everybody is interested in Genesis transformation journey that's looking at our stack, and we're fully focused on delivering that successfully. That's part of the transition that we're going through. And yes, it's important that we land it and make sure that Genesis is in a good spot, which I think we're pretty good at doing this. But these transformations are pretty sizable programs.

Yes. I guess, I was referring to prospective brand-new full stack G2 customers that might be sitting in the pipeline because migrating to a new system is -- there are challenges with it, and obviously, they want to see that the migration goes smoothly presumably. I mean, is there a bit of that or not really?

There's always a bit of that and the conversations, but the reality is a lot of the transformation of [ G2 ], we -- at some point, and we'd be more than happy to take people through it, and we have in the past. The way we modernized our stack by ingesting salesforce and providing some of the older technology to be cloud native is an evolution. So it's not a complete rewrite. So it makes for an easier landing zone for our current customers, and it makes for a much more palatable story for new customers. So I think this is something that we can manage. But any company that has an installed legacy base and modernizes goes through the type of conversations that you're referring to, and we're navigating it well. So yes.

Okay. Just on your European expansion. If we exclude the Middle East, are these specific countries in Europe that you are targeting that are looking right for entry perhaps due to the state of the smart meter rollout or otherwise or other catalysts?

So we're in conversation in several countries in Europe. We don't really, really have a direct target for -- we didn't -- and I think I might have spoken Josh about this before, but we didn't say, hey, these are the 6 countries we're going to target. What our objective is, is to find those retailers that want to transform, get to them early and tell our story and engage and win that business. Now if we go to a country and we win in it and then it's got several other retailers in the country then we want to do what's called N-plus-1, we want to win many other retailers also in that country. But rather than honing in, on some specific targets, we're taking a general view of Europe. And then, once again, we're -- we go to shows, we do LinkedIn campaigns. We do [ shoot other ] sales. And when we find somebody that's serious about transforming, then we really focus in on and play to win.

Okay. Great. And just last one for me. Have you decided on a commercial arrangement with Amber here, just in terms of the existing arrangement, I believe, is any customers of Amber need a direct subscription if you are selling Amber to other utilities. Will it simply be a case of that utility may be integrating Amber into a differentiated product that utility offers. Is that how you see it playing out?

The Amber relationship internationally is not exclusive to us. That was not part of the deal. They can run on other stocks, if there's interest. We're helping them quite a bit. And I think we're pretty well aligned with their team, and there's good trust there. But it has to make sense. I mean, if they have -- if that customer has an installed billing stack that could -- they could integrate to, then we don't have the right to stand in the way of that. But we're helping [indiscernible], and I think that, that will pay off for us, and it will be a good insertion point for us to have the broader conversation about the whole billing customer care stack. So that's part of the strategy. We're really pleased at this point with the progress that the teams are making. But I want to repeat, it's not an exclusive arrangement.

Your next question comes from the line of Owen Humphries from Canaccord.

Well done, big numbers again. So just to clarify a couple of things. One, just the Genesis obviously is a product partner for you guys to build out the G2 offering, and you guys are obviously learning that the value you guys can derive from that product. It sounds like the migration of your core customers will occur in calendar year '25, just clarify if that's correct? And could you guys give a better understanding of what the unit economics change once you guys move to the -- both to the cloud or move to G2, what the uplift is the maintenance revenue?

So the transition for the installed base will start in 2025. This will take time. By the way, some of our customers are government organizations. And if they're going to do an upgrade, they may need to go get funding and they may need to have a competitive process. So we just need to be realistic about that, but that is an opportunity for us to do an upgrade. And what we've said before is we expect ARR to increase from 1.5x to 2.5x. This is, I think, realistic. This will take time. What I like about it, though, is it's a book of business that's in front of us for the next 3 years to 5 years, which is always good to have in your back pocket, so to speak. And yes, that's -- we'll learn more, as we roll that program out, and we'll share with you guys, as we learn more about that.

Your next question comes from the line of Jules Cooper from Shaw and Partners.

Look, just one for me. You've talked about material international wins from FY '25 onwards. But when we look at the commentary in the financial statements, you referred to the opportunity to grow your Australian customer base in the near term. Should we think of those opportunities in Australia as material? Or it's more sort of incremental in the material wins of sort of 25% and beyond the international markets.

Since I came into this business, Australia has been growing in the range of the [ mid-20s ]. We have a strong position in Australia competitively very, very strong teams. What's exciting about the Australian market is, there's a lot of retailers there across water and energy, and there's not some kind of major surge of all of them transforming at the same time. So they're doing it kind of in a constant flow, more like a river than a -- than a big storm. So anyway, we've said in the past that we're bullish on our Australian opportunities. There are some big players there. And we will play to try to win those deals, and then we'll talk about them when we have them [ ain’t ] and probably not before that because that would be foolish of us. So we have to just watch this space and see how it evolves. This is the reality.

Excellent. And Gary, it hasn't been lost on us that you continue to reiterate your ambitions to grow at 15%. Now when you first outlined that the base of revenue for FY '24 was expected to be around $150 million and now it's circa $200 million. Can you just maybe talk to the changes you're seeing in the industry and that need to transform, is it continuing to build in line with your growing base of revenue? Or is it sort of really unchanged over that period? I'm just trying to sort of understand that a little bit better. Your confidence seems to be growing despite the bigger base constantly.

So Jules, I may get myself in trouble here because I'm trying to get -- we've had 5 upgrades and I'm like -- I think that before you started covering us, we talked about the FY '24 being $130 million. And then you started covering [ us mid ] $150 million, then $170 million, and now we're at $200 million. We are -- as I said in the presentation, I mean -- and by the way, we were not intentionally misleading about that. When I started this company, it was COVID and all this type of stuff. The -- we're really, really bullish about the space we're in. I live and breathe it every day, and the industry is on the march -- is on the march. Now, we go in different paces; in different countries, but it's happening. And so, the real question is what will happen on the international front. We continue to perform well in our core markets. The pace of change is just -- as we said, I mean, the change of orders, regulatory changes, [ the ] stuff is good for us. But you have different dynamics. I mean, the U.K. market went through more of a surge of transformations, and so they have less behind it than, for example, Australia, which is more steady with transformations. And then you -- so one of the things that makes us cautious because I think we built a -- we've really, really focused on trying to build trust with the investor community. We just need to be cautious about the international front until we have more proof points. And we're trying to be -- we didn't -- I didn't talk about the underlying growth almost at all because we don't want to trigger expectations that in our core markets that are -- that high for the long term. I mean, the rates that we've seen this last period, for example. So -- but anyway, we need to continue delivering on our core markets and then see what the success rate is international. We will report on it as soon as we have the numbers to do that. So sorry not to be a little more precise, but I think that's just the reality of where we are at the moment.

Your next question comes from the line of Chris Gawler from Goldman Sachs.

Can you hear me, okay?

Yes. Hi, Chris.

Great. First question, just on the FY '24 guidance, just noting that it does imply that revenue is flattish half-on-half in the second half versus first half. Just wanted to get your thoughts around the visibility on project [ work ] and whether there's any conservatism embedded in that guidance?

Chris, it's John. The question came through a little disjointed. I think I've kind of got the gist. So hopefully, I'll answer in the right way. I think you're sort of asking about in terms of the full year guidance, it's implying relatively flat sort of picture, half 1 and half 2 and sort of some of the sort of dynamics around that. I think that's where the question is coming from. So look, I think it -- I mean, that's exactly what the finance year '24 guidance is implying. We put out there, it will be circa $200 million. So it's kind of going to be similar to the first half. There's always a level of variability when you're looking at project revenues in terms of executing that across the period. We've got really good visibility clearly for this financial year. We're building up a good book of business in terms of our project revenues for beyond that. So look, I think we're really -- we clearly were very comfortable that we could see that increasing level of certainty in that flow of work that's enabled us to come out with the upgrade from at least $170 million to $200 million. I think I've answered the question. But as I said, it was a little bit difficult to capture it.

No, no, that's fine. Thanks for that, John. And just second question, I noticed some of the commentary around market-wide [indiscernible] settlement in the U.K. Do you mind talking about that a little bit more on how material that opportunity could be to the U.K. business?

Look, I think -- look, I think it's -- I think you sort of demonstrated it's one of the -- it's one of a number of areas that is helping us to increase our revenue profile this year. We'll have seen some of that actually happen in the first half of the year. We've got line of sight of that going forward. It's -- I think it demonstrates in the markets that we operate, so there'll always be a level of non-recurring revenue for regulatory changes. And in the U.K., this is a relatively large one. And it's going to -- it will help us for a little while to come, I'm sure. But just to stress, it's one of quite a range of different contributors to our revenue performance that you're seeing in the first half of the year and that's leading us to upgrade our guidance.