On track for a turnaround

After a tough few years, this software maker can see better times ahead

- GRAHAM WITCOMB

SHARES INTELLIGENT INVESTOR

Gentrack (ASX: GTK) entered 2020 with a faltering UK division, declining margins and three profit downgrades in the previous quarter. It all went downhill from there.

The UK utility market is the billing software maker’s biggest segment, and also its best opportunity for growth. Representing a bit over half of total revenue, the division has had three years of stagnant sales due to 2019’s introduction of new laws that limit how much electricity retailers can charge customers. This triggered a domino of declining revenues, falling margins and a slowdown in new project spending.

There are signs a turning point might be in sight. The company has announced a strong result for the six months to March, with revenue rising 12% to $NZ57 million ($52 million).

Despite the significant disruption to its UK operations, the utilities division increased revenue by 15% – and it would have been 25% without the 12 UK customers that became insolvent during the period.

The company continued to win new contracts, with five new utility customers installing Gentrack’s billing software. It may not sound like much, but that’s champagne-worthy in this industry.

Once installed, Gentrack’s software becomes the utility’s core – its cashflow engine – and the high cost and time required to switch providers make customers “sticky”, both to Gentrack and its competitors. Gentrack had only seven new customers in all of 2021.

The UK regulator, Ofgem, also appears to have realised that the price cap system isn’t working – 29 energy companies have closed shop or been put into special administration since its introduction, nine of which were Gentrack customers.