Gentrack's day of two halves

Gentrack chief executive Ian Black says company has a good pipeline of orders for 2019.

By almost any measure, Gentrack reported strong growth in its half-year result.

The NZX-listed maker of operational software for airports and utilities yesterday reported an 80% jump in revenue to $52 million and a 50% profit rise to $8m.

And its outlook was bullish. Chief executive Ian Black says the second half will be as strong as the first, implying full-year ebitda of about $31.8m.

Major acquisitions during 2018 seem to be paying off (a rare feat in tech or any other industry), and the 200 new staff that came on board with them have been integrated, Mr Black says.

He notes a strong pipeline of work, especially in Australia and the UK, and says his company has good visibility on new orders. 

Positive press followed the good numbers and Gentrack shares ... fell, and kept falling. They finished the day down 6.58% to $6.96.

Why?

Pie Funds chief executive Mike Taylor notes full-year ebitda forecast was shy of the $33.7m analyst consensus (as tracked by Bloomberg).

Mr Taylor remains bullish on Gentrack but he says he can see how the modest forecast miss would have sparked some selling.

He suspects there were also some investors "who were overly-optimistically expecting an upgrade" or a number north of the Bloomberg consensus.


Gentrack performance since its 2014 IPO. Shares [NZX:GTK] closed yesterday down 6.58% to $6.95 but are still up 51.09% for the year.

One analyst, who did not want to be named, picked up on this theme, noting Gentrack has developed a reputation for being overly cautious in its guidance. 

Last year, it beat its ebitda guidance by 19%, the year before by 11%. Analysts are now in a cycle of constantly trying to second-guess just how conservative, or overly conservative, the company is being with its forecasts.

Mr Taylor says this state of affairs dates back to Gentrack's first earnings report after its 2014 IPO.

The software company was hammered for a revenue miss, which was pinned on a major contract being delayed.

Gentrack learned its lesson. Since then it has erred on the side of caution with its guidance, attempting to allow for the lumpy nature of contract revenue in the utilities market. But, possibly, it has gone too far in the other direction, analysts contend.

Another member of the IPO class of 2014, Orion Health, has also had an issue with lumpy revenue – although in its case, it's developed a reputation among analysts for being "consistently over-optimistic."

Although the two companies share the same revenue unpredictability problem, Orion has made a string of losses since listing, while Gentrack has been consistently profitable – and has been rewarded with a market cap that, even with yesterday's dip, still sits at a very robust $632m, dwarfing Orion ($132m) despite the healthcare software maker generating four times the revenue.

Gentrack was one of Mr Taylor's three local picks in NBR's Hot Stocks and Ones to Watch predictive piece, published at the start of the year.

Yesterday's sharemarket sell-off aside, it's still looking like a solid pick. Overall, the software company's share price is up 51.09% for the year.

The lesson: if you're investing in a company like Gentrack, which has difficulty forecasting short-term revenue, make sure you're in it for the long haul.

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