Gentrack: Interim result 2016

This billing software maker achieved impressive growth in the UK in the first half, and its Airports division almost doubled its operating margin.

At billing software maker Gentrack's last full-year result, management said it expected revenue to increase 10% in 2016. In the six months since then, the company has already beaten that incremental sales target, leading management to lift its 2016 forecast to 20% growth.

Gentrack’s interim result for the six months to 31 March was excellent. Revenue rose 26% to NZ$23.3m compared to the first half of 2015, thanks to a 35% increase in services revenue and an 80% increase in revenue at its small UK water utility business due to the addition of new customers (see Gentrack, water and illiquidity).

Key Points

  • Services revenue increased strongly

  • Higher revenue and flat costs for Airports

  • Management increases guidance for 2016

It’s worth noting at this point, though, that services revenue derived from one-off projects – which accounts for 31% of total revenue – is discretionary. It’s more sensitive to the general economy than subscription fees and licences revenue. Revenue from recurring fees is the number we’re most interested in, but that too didn’t disappoint, growing 11%.  

Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 23% to NZ$6.7m, with the slightly narrower margin due to higher staff costs. The company increased its headcount by 20% in anticipation of future growth, leading to a 28% jump in employee expenses and recruitment costs.

We wouldn’t be surprised to see the current EBITDA margin of 29% gradually shrink further as it still exceeds that of its competitors, such as Hansen Technologies, which has a margin of 25%. Nonetheless, we’re happy to trade a slightly lower margin – due to a higher proportion of upfront development and staff expenses – for higher growth rates. And with a cash balance of NZ$9.9m – up from NZ$5.4m – Gentrack has sufficient funding for its immediate plans.

Gentrack now earns half its revenue in Aussie dollars and a further 22% in British pounds, yet still incurs the bulk of its cost in New Zealand dollars. With this in mind, the company benefited from the declining NZ dollar compared to the pound. Currency movements added around 4% to revenue growth for the period.

Airports flying high

The star performer of the result was the company’s Airports division (16% of total revenue), which makes airport operating systems that manage aeronautical billing, flight information displays and baggage handling.

Table 1: Gentrack interim result
Six months to March 2016 2015 /–
Revenue (NZ$m) 23.3 18.5 26
EBITDA (NZ$m) 6.7 5.5 23
NPAT (NZ$m) 3.8 3.1 21
EPS (NZ cents) 5.2 4.2 21
Interim dividend 4.2 NZ cents (up 2%),
10% franked, ex date 9 June

Gentrack is by far the dominant supplier of airport software in Australia and New Zealand, with its system installed at 85% of the region’s airports. During the half, the company completed the installation of its software at Sydney Airport, and signed new deals with airports in the USA and Iceland. Revenue from the division grew 36% in the six months to March.

Better yet, Gentrack’s Airport 20/20 software is relatively ‘off the shelf’ compared to its customised utility billing software. This means revenue is able to increase faster than costs as the company can sell its product to a growing number of customers without needing to increase the number of software developers.

Staff numbers over the year were flat for the Airports division, which – combined with the significant revenue growth – meant that the EBITDA margin rose from 25% this time last year to a mouth-watering 40%.

Management expects revenue to increase 20% in 2016 and EBITDA of NZ$15.0m. The stock has risen 42% since we upgraded it in Gentrack cleared for takeoff on 12 Aug 15 (Buy – $1.80), putting it on a free cash flow yield of around 6.0% based on 2016 estimates. With captive customers, recurring revenues, no debt and decent growth prospects, we continue to recommend you HOLD.

Note: With several substantial shareholders, Gentrack’s stock is highly illiquid with a large spread between the bid and offer prices. To ensure you aren’t caught overpaying, it’s important your purchase orders have a limit price and are not made ‘At Market’.

Disclosure: The author owns shares in Gentrack.

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