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Edited Transcript of GTK.NZ earnings conference call or presentation 23-May-19 10:30pm GMT

Half Year 2019 Gentrack Group Ltd Earnings Call

Auckland Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Gentrack Group Ltd earnings conference call or presentation Thursday, May 23, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian Black

Gentrack Group Limited - CEO

* Timothy Mark Bluett

Gentrack Group Limited - CFO

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Conference Call Participants

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* Andrew James Bowley

Forsyth Barr Group Ltd., Research Division - Head of Research

* Blair Cooper

* Chris Bainbridge

Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager

* Claude Walker

* Guy Hallwright

Woodward Partners Limited, Research Division - Director, Equity Research

* Joshua Dale

Craigs Investment Partners Limited, Research Division - Research Analyst

* Philip Campbell

UBS Investment Bank, Research Division - Analyst

* Tristan Joll

First NZ Capital Limited, Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the Gentrack Investor Update Call. Today's conference is being recorded. At this time, I would like to hand things over to Mr. Ian Black, Gentrack's CEO. Please go ahead, sir.

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Ian Black, Gentrack Group Limited - CEO [2]

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Thank you, and good morning. This is Ian Black. I'm Gentrack's Chief Executive Officer. I'm joined by Tim Bluett, the company's CFO. Welcome to the call. I'll be presenting our interim results for the half to 31st of March 2019. I'm going to talk along to a presentation which has been provided with this call.

I will start with a brief introduction to the company. Our vision is to be the leading specialist provider of business applications to energy and water utilities as well as airports globally. We proudly support over 220 customers, 30 countries where our solutions are mission-critical, deeply embedded and highly valued. Our business model delivers a high level of recurring revenue and very profitable growth, and we distribute the majority of our profits as dividends.

Our target markets, they're experiencing a period of significant change. Airports are under pressure to utilize airport [infrastructure] and resources very efficiently, and they're continuing to strive to improve passenger experience. This is forcing airports globally to invest in technology. In the energy sector, energy shifts to renewable sources and generation consumption and storage models are changing, and our target market is looking to technology solutions to help them compete more effectively. Traditional suppliers are challenged by new entrants, government regulations and customer pressure to drive down their cost of sales. In the water sector, excellence in customer experience has become more focused. So all of these factors are driving demand for our solutions and creating opportunity in our existing customer base and in the wider market.

I'll talk on Slide 4 to achievements in the first half. We've completed productization of key solutions for markets in the U.K., Australia and Singapore. We've added new customers. We've got 4 new utilities in the U.K. signing for our latest SaaS solutions and an airport in Australia. Very pleasingly, Gentrack customers rank in the Which? survey in the U.K. as 4 -- as 6 of the top 10 suppliers scored on customer satisfaction ratings. This is a significant endorsement of the value that the Gentrack solutions deliver to them.

We have seen continued deployment of our Gentrack Cloud Integration Services platform, and we've won key projects in all our markets. I've noted some of the recent wins in this slide. Veovo had follow-on projects at Ports of Jersey and Wellington Airport. We've had projects kick off in Perth, Orlando, Melbourne, London City, Auckland and Newark. So a lot of activity in the first half and a growing pipeline of new prospects building.

Turning to our financial highlights. Revenue at $54.4 million is slightly up on the same period last year, which was a very strong half. EBITDA at $12.8 million is up on guidance. Underlying NPAT was $4.6 million, and we have announced an interim dividend of $0.05, which is in line with last year.

Just to provide some more color, the -- on 6, we talk about comparative results. Overall, revenue is certainly improving. The company's been making investment in productization as I've highlighted, and we've also been building new solutions to support our longer-term strategy in the move to SaaS. I've made -- I've got to make some comments a little bit on the revenue mix that underlies and supports this -- the revenue picture.

7. We can see an overall increase in revenue, but the underlying change in revenue mix is quite significant. In the first half, we saw recurring revenue of $37.7 million, up 26% on the first half '18, which are now comprising nearly 70% of our total revenues. It's also clear that perpetual licensing is declining as the shift to SaaS occurs. So in the first half, it can be characterized as reflecting that move to SaaS licensing, and we are seeing the benefits of productization flowing into recurring revenue streams.

Just a couple of other measures that we are tracking in the organization, moving to Slide 8. Specifically, annualized recurring revenue, which is looking at March '18 recurring revenues and multiplying that by 12, our core organic with annualized recurring revenue growth was 33% up on prior comparative period to $74 million. This is organic growth and doesn't incorporate acquisition revenues. It's also notable that as we transition to SaaS, we see increase in lifetime value from our customers. Specifically, on average, our customers will deliver 1.5x traditional perpetual license model revenue over a 7-year period. So this -- as this move to SaaS occurs, we're expecting the tail of revenue to increase as well.

Just moving on to 9 and looking at the divisional analysis within the organization. The airports business represents -- still represents about 20% of the company's revenue and profit numbers. Overall revenues for utilities were

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half on half, but this belies the fact that we've seen a significant shift from the one-off perpetual licenses to SaaS contracts. The airports business has performed very well in the first half as project work in the U.S.A., Australia and Europe has increased. We saw a large contract for Blip, and revenues are up, but the nature of the revenue mix has led to some lower-margin work in that half. In addition, we're investing to establish our presence in the U.S. market where there's a strong pipeline of work developing.

Turning to the geographic breakdown. The overall picture here is one of continued international expansion. The U.K. is delivering strong growth, continuing that trend. We're growing markedly in the Americas and Southeast Asia. Australia reflects the fact that FY '17 and '18 had significant projects underway, and there's a high level of regulatory work driving revenue. But we are currently seeing a lift in activity as the government's introducing new regulations in that market. Pipeline is strengthening, and we're seeing new projects ahead in Australia. New Zealand continues to perform well and is a very stable market for us.

A few words on the people side of the business. We -- in absolute terms, we've been able to deliver a growth and the investment in our solutions without actually adding many people this year. However, we've continued to shift our skill set as we implement the business strategy. We're attracting top talent, our brand is gaining strength, and we've got good retention levels. But we're also adopting new ways of working to support the -- both the development activities we're undertaking and also running global operations at scale.

Just moving on to talk about the impairment of CA Plus. CA Plus was acquired in May '17 as an early stage business delivering retail and concessionaire management solutions for airports. In September '18, based on the sales results, we revalued the deferred consideration and impaired goodwill with a net impact of $100,000 from $50,000. During the 6 months to March 2019, the expected sales growth we had forecast has not been delivered, and we're taking the decision to write the investment off with a full impairment of the carrying value. However, there's a clear demand for this solution to manage concessionaire revenues in the global airports sector. We're going to be fully integrating the business into the 20/20 portfolio, and that will enable us to leverage the knowledge and people and capabilities that we've gained through this acquisition as we reshape our approach to market for this capability.

I would also just make some comments on the other acquisitions. So turning to 13. Junifer continues to gain market share in the U.K. as a solution. We've also launched in Australia with a strong pipeline of opportunity and our first customer going live in the Australian market this half. We've also planned the entry of the Evolve solution set into Australia. There seems to be strong demand and opportunity for Evolve. It's performing well in its home base of the U.K. And Blip is growing very strongly in North America, and we've seen cross-selling opportunities into the existing customer base. So we're very pleased with the traction we're getting with these acquisitions.

Also just to make some comments on the dividend. We've announced a $0.05 per share interim dividend, which is the same as the first half of last year. We've made a revision to the dividend policy which was set 5 years ago and we revised the dividend. Going -- so going forward, there's a revision of the policy. Since the IPO, we've actually made some new acquisitions, and NPAT more closely reflects the cash generation within the company today.

I want to get to the outlook for FY '19. We've got a strong second half forecast, and our full year EBITDA result is expected to be slightly ahead of FY '18. Of course, as always, the caveat that results are dependent on the timing of our contracts and our project milestones. As a result, we've seen some cautious investment behavior in the U.K. as a result of Brexit. We've seen -- and price regulation and some fewer new entrant energy retailers coming to market, although we have in the first half, as you'll note, added new customers. So there is still momentum in that market.

The Australian

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[regulation] that is coming in this year introduces default market rates. So that will create a little bit of uncertainty in the base. But probably, we'll see the same impact that will drive new opportunities for us into next year as the regulatory effects take shape. One thing that is clear to us as well though is that we've seen increased acceptance by utilities of our SaaS-based solutions. We now have contracts with 4 of the Big 6 U.K. energy suppliers and see significant growth potential inside those companies. Our existing customer bases are growing in the U.K. -- our existing customer base in the U.K. is growing. And therefore, based on these increased recurring revenues and our strong pipeline of new opportunities, we remain confident in our 15% long-term organic EBITDA growth target and we are -- I will hand over at this point to the moderator to open the line up for any questions that people want to ask about the results we've announced.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question from Andy Bowley, Forsyth Barr.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [2]

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I've got a couple of questions here. First of all, around CA Plus. So it's a bit disappointing, I guess, for you in terms of the progress that hasn't been made at CA Plus but also for the investment community. In light of what you've experienced around the last couple of years in that business, what would you have done differently in terms of due diligence and strategic decision making given what you know now? Or how does that change in terms of how you think about M&A in future from here in terms of accessing new markets?

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Ian Black, Gentrack Group Limited - CEO [3]

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Yes, so good question. We are disappointed with the outcome at CA Plus. I think the -- we've realized from day 1 that this was an early stage company, and therefore we -- and we were selling a solution for which there was little competition and was -- has really been a new market opportunity. So we understood some of the risks, and we also saw a very strong pipeline of opportunity and an existing customer base. So I think the due diligence question is something that we continue to push very hard and we're doing reviews of new opportunities, but the fact remains that we believe very firmly there's a market opportunity for this proposition. We see demand in the airports. And what we've also observed as we've gone through especially the last half is that there is key demand in our customer base. So we've taken that decision to fold in the IP, create a new module within the 2020 suite and we launched the proposition as an extension of the revenue solution set in 2020.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [4]

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So just an extension there, Ian, can you give us an idea what the revenue and profit contribution of CA Plus was in the period and how many people work within CA Plus or worked within CA Plus then?

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Ian Black, Gentrack Group Limited - CEO [5]

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So in the period, there's about 4 staff in CA Plus and we -- so we've seen revenue contribution from the existing customer base. Let me get those numbers to hand and I'll reprise that.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [6]

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Great. Second question around -- sorry, you got -- Tim, you got...

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Timothy Mark Bluett, Gentrack Group Limited - CFO [7]

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(inaudible)?

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [8]

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Was there a follow-up answer on the CA Plus numbers?

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Timothy Mark Bluett, Gentrack Group Limited - CFO [9]

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No, I don't think we break those out. So...

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [10]

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Okay. I'll kick off with my -- sorry, Tim, there's a slight lag on the phone, but you go ahead.

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Ian Black, Gentrack Group Limited - CEO [11]

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Can you hear me now? Hopefully, you can hear me now. So the contribution in the revenue level in the half was just around about $0.5 million. It's worth saying that we'd expect now it to be making profit. We also have 10 customers in the -- using the CA Plus suite, but it's an operating business. But we feel that it's not performing to the expectations we had during the acquisition.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division - Head of Research [12]

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Okay. Fair enough. Look, second question around the comments you've made around the U.K. market and the Junifer business. So I think you made the comment, Ian, that existing customer base in the U.K. is growing. Can you give us a sense of the underlying progress in the U.K. ex Evolve? Clearly, that's been a benefit through this year from what you report around your revenues. And then I guess what's the underlying like-for-like software investment by existing customers? Is it still declining in light of the Brexit uncertainty? Or we're kind of now at a trough and there's still a need to invest in software by these customers because you can't defer software investment indefinitely?

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Ian Black, Gentrack Group Limited - CEO [13]

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So I think the underlying story is that -- is we've seen real success recently with the Tier 1 providers, the Big 6, and they're all looking to reduce their cost to serve to compete more effectively and deal with regulatory changes coming through. The pipeline is extremely strong in the U.K. So we're seeing good performance from our existing customer base in growing their businesses and also from establishing a very strong competitive position leading to a healthy pipeline looking forward. So I think the U.K. is a great success story and that's -- although -- and that is in spite of some Brexit uncertainty that belies the whole market in the U.K.

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Operator [14]

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Up next, we'll take a question from Guy Hallwright, Woodward Partners.

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Guy Hallwright, Woodward Partners Limited, Research Division - Director, Equity Research [15]

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I had -- I was just interested on some more comment around what's happening to margins because I noticed that they've obviously fallen in utilities and there's a cost ahead of these deferred projects and the revenue's not coming and that's understandable, but they were also down somewhat in the second half last year. And in airports also you had a decline in the second half last year and another decline in this period. Can you tell me what's happening to prices relative to cost generally? Are you finding price pressures are increasing? And how confident are you with your 1.5x revenues from movement to SaaS that you've talked about being sustainable?

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Ian Black, Gentrack Group Limited - CEO [16]

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There's a number of questions in there. So I think, firstly, the -- we've signaled quite clearly we've made some investment in product as we shift to SaaS. That's both in development costs and also people that we plan for projects. So those have been the key cores of margin impact in the first half of this year, a little bit at the end of last year. In terms of price pressure, we -- so going back, you also asked about airports. I think the airports, I've signaled, is really just a timing issue of the revenue mix we've seen come through in airports. So it's about margins on projects and the types of solutions we've been selling. So that's a more timing question.

In terms of price pressure, we actually -- whilst we're always under competitive threat and price pressure, we're not seeing significant change to the offers we make in the market and the price we're getting for our products. We have a number of reference points that allow us to measure what the lifetime value of customers are who have taken traditional solutions from us on a perpetual license compared to SaaS offers, and that's why we are confident in the long-term total lifetime value statements we've made. So I think that's probably the 3 questions I detected there.

I think the -- one of the other comments to make overriding all of those is that we signaled over a year ago that we would be making a transition to more SaaS-based revenues. And so there is a revenue mix shift. We're seeing less perpetual upfront large software licenses, and in this half, we had none. So that's bound to have an impact on top line revenues but drive that recurring revenue stream and as I said earlier, the -- deliver the long-term value to the company of the revenue -- the greater revenue shift in SaaS -- in the SaaS model.

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Operator [17]

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Next up, we'll hear from Phil Campbell, UBS.

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Philip Campbell, UBS Investment Bank, Research Division - Analyst [18]

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Just a few questions from me. So I just noticed in the balance sheet and the cash flow statement, you did draw down some debt in that half. It's obviously on the short-term level at least, but just kind of curious as to why that was the case. The second question is just on the R&D and extent to which that was capitalized. I couldn't find that in the release, but I'm assuming it's there somewhere, but if you could just give us some guidance on that.

And then the last question was just on the guidance for the full year. Obviously, quite confident you're going to get a number for EBITDA just north of the $31 million. Obviously, that implies quite a big increase in margins in the second half. So I'm just wondering if there's some sort of like labor cost or something else that's impacting the first half numbers that won't be repeated in the second half in order to get that margin uplift.

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Timothy Mark Bluett, Gentrack Group Limited - CFO [19]

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(inaudible) So I'll start with the debt. We have a working capital facility, Phil, and had one for a while, which is really just part of our treasury management policy. So we did utilize it this year just to help manage sort of working capital needs across the subsidiaries. We've got a quite complex structure in different subsidiaries in different countries and jurisdictions. So just to help manage that position, but we've always been cash positive. And we were cash positive on that basis, and we expect to continue to be so going forward.

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Ian Black, Gentrack Group Limited - CEO [20]

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Question on the question around the cost?

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Timothy Mark Bluett, Gentrack Group Limited - CFO [21]

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On the cost, yes, so our total R&D costs, I guess, big picture, we've seen our total costs that we're applying to R&D increase over the last few years. I think 2017 is 5.1. We reported about $11.2 million last year for the full year, and for the half year, we're $7.2 million, $7.3 million. The capitalization obviously is part of our product strategy, and we've seen that increase $3.7 million last year full year. $3.3 million is what we capitalized in the half for this year. We think we've peaked now. We're starting to complete some of those projects, and so that will start to reduce now going forward. But obviously, this is a big part of our investment in the product-driven business and in the move to cloud-based infrastructure.

Lastly, you asked about growth in the second half and whether there was an underlying cost, if I've got that right, in the first half which we won't see. I think the major factor is that revenue opportunity in the second half and the efficiencies we're getting in driving a SaaS business forward in the second half. So there's a lot of cost [avoidance] it's more a factor of the timing of the projects and work that we're doing and the underlying business strength that we have.

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Operator [22]

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We'll take another question from Joshua Dale, Craigs Investment Partners.

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Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [23]

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Just a few questions from me. I noticed the wording of your guidance has changed slightly. At the AGM, it was for EBITDA to be up on FY '18. Now it's to be marginally ahead. Are we to read anything into that? And has your confidence for a strong second half delivery declined slightly since the AGM?

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Ian Black, Gentrack Group Limited - CEO [24]

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No. No, not at all. Just trying to communicate the forecast we see right now.

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Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [25]

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Okay. And just on the write-off of the CA Plus acquisition. Has it given you any caution or is there a change in strategy when it comes to acquisitions going forward, perhaps no longer considering businesses that are so early stage?

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Ian Black, Gentrack Group Limited - CEO [26]

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Look, we are considering other acquisition opportunities all the time, and we're always cautious about them. We've been very pleased with the success we've had in 3 of the 4 acquisitions. We did see some risk in the structure of the CA Plus. A great -- a put option was put in place because there was greater risk around the probability of that pipeline maturing. Of course, we will apply great discipline to future acquisitions, and we learn from these experiences. So it's really important we apply that when we do, do our due diligence going forward. I would say though that we're not unhappy with the actual proposition. It's just making sure we've got it properly presented and delivered to the market so we can truly monetize that investment. And we are looking to get a recovery on that investment going forward once we've brought it into the fold and drive it as an integral part of the 2020 proposition.

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Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [27]

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Okay. Great. And you mentioned briefly earlier opportunities in the U.S. Is that for the utilities division also? And if so can you talk a bit more about that?

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Ian Black, Gentrack Group Limited - CEO [28]

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No, that's specifically for airports at this stage.

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Joshua Dale, Craigs Investment Partners Limited, Research Division - Research Analyst [29]

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Okay. No, that's fine. And just last question, capitalized development. It was $3.3 million this half. Do you expect a similar level for the second half? And reconciling that with your comments at the AGM about capitalized development cost sort of trailing off into FY '20, is there any sort of guidance you can provide around that?

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Timothy Mark Bluett, Gentrack Group Limited - CFO [30]

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Josh, $3.3 million is correct in the half. We see that reducing going forward. Although when guiding on that, we see the second half this year to be a reduction on that. We still have a couple key projects still work in progress and some new product developments as part of that, which brings new opportunities. But as we said in the past, we see that capitalized levels beginning to reduce now. We believe we have peaked.

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Operator [31]

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Your next question comes from Tristan Joll, FNZC.

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Tristan Joll, First NZ Capital Limited, Research Division - Director of Equity Research [32]

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I don't have too many left. Just a couple of finicky number ones. In terms of the contribution that [resolved] in the half, I realize that that's not disclosed, but you had a Q4 EBITDA run rate on that of about $900,000. Is that -- would it be reasonable to say that the doubling there was something like what they contributed in the half?

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Ian Black, Gentrack Group Limited - CEO [33]

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Wouldn't be unreasonable. I think they are performing very well against our expectation. It will be slightly better than that.

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Tristan Joll, First NZ Capital Limited, Research Division - Director of Equity Research [34]

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Okay. Okay. And then just going back to your comments around the airport business and around the impact of the impairment, I think you said CA Plus contributed revenue of $0.5 million. Can you give us a sense of what the EBITDA drag would have been? I guess what I'm trying to get to is EBITDA in that division was flat. What could it have been without the impact of that?

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Timothy Mark Bluett, Gentrack Group Limited - CFO [35]

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The EBITDA was really quite immaterial, which is part of the reason we have to review the business. So it really wasn't making a significant impact.

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Tristan Joll, First NZ Capital Limited, Research Division - Director of Equity Research [36]

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Okay. So I guess the question that follows that then is what was happening in their margins? Why wouldn't you get growth in EBITDA when the top line is growing?

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Timothy Mark Bluett, Gentrack Group Limited - CFO [37]

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This is CA Plus you're talking...

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Tristan Joll, First NZ Capital Limited, Research Division - Director of Equity Research [38]

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No. No. I'm talking about airports in general.

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Timothy Mark Bluett, Gentrack Group Limited - CFO [39]

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CA Plus wasn't driving that. It was break even to a very small loss...

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Ian Black, Gentrack Group Limited - CEO [40]

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If I -- I'm going to try to comment on the airport. I think we -- the airports business had a very good revenue outcome for first half, but there was a little in the mix of that -- of the project workaround to taking the margins we made on the initial phase they're in and also the nature of a couple of large contracts for Blip that were -- in the Blip model, we supply hardware as part of that solution and that has lower margin. So it's something about the timing of revenue mix on projects and product that will get supplied to those in that first half revenue.

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Tristan Joll, First NZ Capital Limited, Research Division - Director of Equity Research [41]

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Yes. Okay. No, that was -- yes, some of that. And then just finally, I mean a few people asked about the guidance. I suppose the direction of travel in terms of start-ups and new business activity, are you seeing any improvement in your prospect then? Or is it still just a very uncertain static environment?

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Ian Black, Gentrack Group Limited - CEO [42]

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I just think the volume's low. There are still [new coming] -- new entrants in the energy sector for us. Yes, no, there are still new entrants coming and you'll see it from our customer list, we've added some, and we've got some new prospects that we're working through right now. What I would say is that the backing behind these new entrants especially in the U.K. market is far more stable and reliable and the government's put in place measures to make sure that they're well funded. So that's a good thing for the market. So -- and we do expect to pick up our own fair share of those opportunities. But there is a -- in our pipeline, there's a shift to larger projects. And we, as I've indicated, we're very fortunate to have a now significant presence in the Big 6 in the U.K. We're seeing a growing pipeline in larger utilities in Australia. So it's certainly not reliant on startups for growth in the organization.

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Operator [43]

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(Operator Instructions) Next up is Chris Bainbridge.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [44]

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So I just have -- so 3 questions from me. First one, head count. The head count was 552 at the half year. Where is that sitting currently? And where would you expect to end the year?

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Ian Black, Gentrack Group Limited - CEO [45]

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I think, Chris, you slightly broke up there, but current head count is marginally above that as it stands today, and we will add some more heads through the year as we take on some new projects. I don't really want to give a forecast as to where the head count will end at the year-end right now. So -- but it's -- but it will be marginally up from where we are today. I would reiterate that one of the opportunities that we are realizing in the company is to remix the head count and actually get better efficiency out of our current staff as they help us with deploying SaaS-based products -- sorry, in the cost to deliver and we're getting better utilization that way.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [46]

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Right. But I mean you've got the 21 open positions on the website at the moment. Should we sort of read anything into that?

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Ian Black, Gentrack Group Limited - CEO [47]

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Well, one of the things we've done is actually shift the way we're recruiting a bit in the U.K. because we're finding agencies are much better source of applicants in the U.K. than websites. But I think the -- there are certainly open opportunities -- there's open roles in all countries at the moment.

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(inaudible) drive for the -- to deliver the revenue we need for this year.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [48]

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Just on that margin point. So you sort of expect to see margin benefit certainly shift to ARR at the time of the AGM. I mean if margins are sort of 29.7% in FY '18, let's call it, 30% per annum in terms of FY '18, where should we expect margins to sort of track in FY '20?

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Ian Black, Gentrack Group Limited - CEO [49]

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Yes, we're certainly driving that objective longer term, and we're looking to head up to previous margin levels. But we don't see that -- we'll see that impact probably in FY '20, FY '21 as we see the true impact of SaaS and the rollout and also the shift in revenue mix at the top line washing through.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [50]

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Right. And by sort of prior level, I mean what are you referring to there?

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Ian Black, Gentrack Group Limited - CEO [51]

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Up to -- well, above 30%. I think in the past, we've even achieved levels of 34%. So that's what we're obviously seeking to get back to.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [52]

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Right. And you think you can do that sort of over the next couple of years?

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Ian Black, Gentrack Group Limited - CEO [53]

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That's actually the ambition and plan.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [54]

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Right. And just acquisitions, I mean what sort of capacity do you have for acquisitions in terms of firepower?

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Ian Black, Gentrack Group Limited - CEO [55]

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Well, obviously the nature of acquisitions is such that some are very large and some are small. So we've got $50 million of funding -- access to funding, which is approved, and we will consider acquisitions on their merit. We've got the capacity and the leadership team to look after acquisitions, and now we've got a track record of 3 successful integrations. So there is capacity to do more, but there's nothing that we're signaling that's imminent right now.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [56]

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Right. So essentially, you would look at acquisitions up to $50 million? Or I mean what would you be looking at, at the high end?

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Ian Black, Gentrack Group Limited - CEO [57]

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Well, we can look at acquisitions up to the value of $50 million -- of the existing $50 million facility, but we would have to raise money for anything greater -- anything larger than that.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [58]

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And then just around the mix, final one from me, in terms of the mix for the second half. I mean should we expect an increase in license revenue in the second half to get that guidance?

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Ian Black, Gentrack Group Limited - CEO [59]

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Yes, you're talking about recurring licenses? Or soft -- sorry, can you just repeat the question?

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [60]

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So I guess we've seen license -- the change in mix in terms of revenue, license revenue has been trending down. But in order to hit the sort of guidance in the second half of, let's call it, sort of $18.5 million EBITDA, do you expect to see an increase in license revenue in the second half kind of one-off licenses?

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Ian Black, Gentrack Group Limited - CEO [61]

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That would be an element of that. I think it's predominantly though projects and recurring revenue licenses, SaaS licenses that we're seeing ahead of us.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [62]

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Right. So we should expect that sort of recurring element to continue growing above that 70% in the second half?

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Ian Black, Gentrack Group Limited - CEO [63]

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Yes, and we -- but we also do see some customers adding more licenses in their current contracts. So there's always an element of perpetual license from our historical licensing structures. But predominantly, it's a new SaaS model, growth in our customer base, certainly new consumers themselves which drives greater recurring revenues and customers going from project into production mode when they start to pay us recurring revenues as well as new projects and going -- and the ensuing software and support licenses from those.

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Chris Bainbridge, Pie Funds Management Ltd - Senior Investment Analyst and Portfolio Manager [64]

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Right. Final one from me, just following on from that point. I mean I guess sort of your recurring level -- recurring revenue growth has been particularly strong over the last couple of halves as you transition. Sort of where do you see that getting to kind of in FY '20, '21 as a percentage of revenue?

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Ian Black, Gentrack Group Limited - CEO [65]

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The answer is probably not too far north of 70% in that we do see some significant opportunities in large companies. So as we've -- our addressable market has expanded over the last 3 years and we are getting success in Tier 1s, they inevitably lead to a bit more services work because they're larger, more complex projects which counterbalances the transition we're seeing in our licensing model. But we'd be very happy with something north of 70% as a revenue mix for next year.

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Operator [66]

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Up next, we'll hear from Blair Cooper, ACC.

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Blair Cooper, [67]

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Look, a couple of quick questions, one high level, one probably a little bit more detailed. Firstly, in terms of the guidance, the 15% EBITDA growth, I just want to be crystal clear in terms of my understanding of that and how you think about acquisitions within that guidance and if they play any part in that 15% growth. And -- first question. Second question, and it's possible I have missed this in the early results, but it looks like there's a new revenue line category just called Other. It looks like it's come out -- possibly out of projects or support. Is that new? And if so what's that point to?

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Ian Black, Gentrack Group Limited - CEO [68]

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Okay. So I'd point to, first, Others, just grant income that we've historically reported in the

(technical difficulty)

will be a new feature. I think, Tim, is there any...

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Timothy Mark Bluett, Gentrack Group Limited - CFO [69]

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Yes, and I think it includes hosting fees and some third-party services that we sell...

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Ian Black, Gentrack Group Limited - CEO [70]

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Oh, and revenues, revenue costs. Apologies.

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Timothy Mark Bluett, Gentrack Group Limited - CFO [71]

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So it's not new. It's always been there, though it's possible it will be a little bit more prominent in the new IFRS 15 layout.

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Ian Black, Gentrack Group Limited - CEO [72]

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Going back to the question on organic growth, so we don't -- we've not factored in acquisitions as a mechanism to achieve that compounding EBITDA growth, to answer that question specifically there. But we do see -- we -- our confidence lies in the fact that we see continued traction in a wider addressable market, so both at the new entrant level and at the Tier 1 level in the second -- in the markets we're in with utilities, and also the ability to address larger airports than we have in the past.

So that's one factor that's contributing to our confidence levels about our growth opportunity. Our addressable market has significantly expanded over the last couple of years. We have more products to sell our customers with -- as Tim mentioned, we are -- whilst we've completed development of some key solutions for productization and SaaS enablement, we're also continuing to add new solutions to the portfolio to deliver more value to our existing customer base. We also are -- a small component of this is, is that we're adding more services capabilities to the organization, specifically our new services features which drive another revenue line for the company.

Our customers are growing. So they're adding customers to themselves, which means that we get the benefit of expanding our platform inside the customer organization with a lower cost to acquire. And as we scale, we are seeing benefits of -- scale advantage and operational leverage in the organization coming through in the future years. So as we've said, we're getting ready for that and investing in our processes and systems to drive that operational leverage. That's probably not seen -- been seen yet, but we understand how we can achieve that.

So those are sort of the fundamental drivers of the confidence levels we have going forward. Lastly, probably our competitive position remains very strong in the markets we're targeting. We're effectively the lead option for utilities considering billing systems and airports considering re-platforming. So we have a very strong competitive position for opportunities that do arise.

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Operator [73]

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We'll take our next question from Claude Walker, EthicalEquities.

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Claude Walker, [74]

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I noticed that the EBITDA margin in the utilities segment was lower than it has been in the past. I was just wondering if you could comment on that, please.

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Timothy Mark Bluett, Gentrack Group Limited - CFO [75]

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The margin in the utilities, I think it relates back to the comments we made about the investments we've done in solutions, but also -- in R&D. But it also relates to the fact that we had geared up with staff to deliver some projects that were delayed in that first half. So we've -- those are the 2 main drivers. It's margin impacting utilities in H1.

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Claude Walker, [76]

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So you're forecasting that if those margins will like bounce back, I guess, historically they've been at least 30%. Or is it going to be...

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Ian Black, Gentrack Group Limited - CEO [77]

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That's what we're saying, yes.

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Operator [78]

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At this time, there are no further questions. I'll hand things back to our speakers for any additional or closing remarks.

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Ian Black, Gentrack Group Limited - CEO [79]

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Thanks very much. Thank you for moderating. We'll close out the call. As always, we're happy to catch up after these sessions in one-on-ones or with any other follow-up questions you may have. Thanks everybody for your time, and we'll see you soon.

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Operator [80]

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And once again, ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.